Even though the bear market is making it difficult to feel good about your retirement saving strategy, investment professionals warn there really is no way to time the market. That’s because if you pull out of the market when it goes down, you risk missing a large return when it goes back up, which can result in big losses. As the chart below demonstrates, when you have a steady approach to your investments, it results in larger returns over time.
In this 20-year period, missing the 10 best of the 5,113 total trading days would have been detrimental.
Dollar Cost Averaging
Financial experts say the best defense against an unpredictable market is to have a strategy that is appropriate for your age, risk tolerance and financial situation and stick to it. This long-term strategy works by investing regularly over months, years, and decades because of a concept called dollar cost averaging. When you contribute a set amount in each of your plan investments every pay period, regardless of how the market is doing, your money buys more units of each investment option when prices are low, and fewer when prices are high. In the end, you generally pay a lower average price per share than if you invested all your money at once. While dollar cost averaging does not ensure a profit or guarantee against loss in declining markets, it can be an effective long-term strategy for retirement planning.
Let Data Guide Your Decisions
To avoid the temptation of trying to time the market, it is important to remember that market volatility is normal and should be expected. Every few decades, the S&P 500 loses more than 35 percent in a two-year stretch and if you pull out of the market when it’s down, you could miss its rebound.
Since the mid-1960s, the S&P 500 has gone through seven bear markets. If you began investing in 1968 and didn't need to tap your savings immediately after drops like those in 1973-74 (down 48 percent from peak to trough) or 1987 (down 34 percent), those dips wouldn't have mattered much. Sticking with stocks, your money would have grown more than thirty-four-fold by December 2008.
Rebalance Your Funds
One way to respond to bear market volatility is to diversify your equities across different industries and different sizes of companies. For example, you may want to consider swapping some or all of the money you have in emerging markets stock funds for more conservative blue-chip foreign equity funds. You could also cut back on a small-cap fund and make up the difference with a blue-chip U.S. stock fund. Or, instead of trying to study and understand the complexities of investing, you could choose to participate in a Retirement Path portfolio, which is managed by professionals who select an investment mix that is appropriate for a given target retirement date.
The most important thing to remember is that even though it is uncomfortable to watch your retirement savings decline in value, maintaining a long-term perspective is critical to investment success.
This Investment Center includes links to tools and information provided by organizations that are not associated or affiliated with Northrop Grumman. The tools and information provided by these organizations are not the property of Northrop Grumman, and Northrop Grumman is not responsible for their accuracy, completeness, or continued availability. You are solely responsible for the investment and asset allocation decisions you make pertaining to your personal savings and investments, including investments in the Northrop Grumman Savings Plan, Financial Security and Savings Program, and any other savings plans sponsored by Northrop Grumman.