Planning is still all about the long-term plan
by Kent Bartell, CFAMr. Bartell is director of investment research at The Standard. Visit standard.com
Planning during a pandemic can be overwhelming, especially with the uncertainties of COVID-19 causing people concern over their investment plans. Employees are likely feeling really uncertain about their financial status and retirement plan right now.
This is a time when advisors can demonstrate significant value, as employees need to hear from them with reassurances and reminders. Even though market swings are normal, big spikes and steep drops can be stressful for people, especially when their retirement is on the line. Reviewing investment plans with employees is a critical step for advisors in the midst of uncertainty in the current financial market.
It’s important for advisors to remind employees that market swings are normal. The latest news headlines and market reports are often challenging for employees to navigate, adding to their own fears about their future. In reality, the average market increase in the year following a 20% or more decline is 47%.
Stick To The Investment Plan
As an advisor, the most impactful way to comfort the fears of employees when the financial market hits some bumps is to help them stick to their personalized investment plan. Not only is helping employees stick to their initial investment plan instrumental during market volatility but re-evaluating their tolerance risk to find a new, clear comfort zone is also vital for financial confidence through market swings.
An important consideration to keep in mind: tolerance risk should be known and discussed. It’s also important to discuss whether or not the employee has suffered a significant financial blow due to the market volatility. In this situation, advisors can help employees reset. Advisors should consistently check-in with employees as circumstances and comfort levels may also shift around their investment plans. Not only does this reassure employees that their approach is tailored to their current needs, but it also allows employees to accept an individual threshold of market volatility.
The Power of Diversification
A key message to enforce with employees is that diversification is vital for any investment plan, but most importantly, it’s an essential way to reduce financial risk. By holding both bonds and stocks, which can respond differently to the same economic events, a portfolio’s risk of taking a loss is reduced. For instance, bonds may rise in value when stocks are consequently performing poorly. This is also an opportunity for advisors to evaluate the plan’s investment menu and plan design.
What are the plan’s principal preservation options? Would employees benefit from managed accounts? Does the plan include target date funds? What is the risk profile of the target date funds in the plan? Have they considered exposure to stable value assets? Continually communicating the power of diversification and additional new investment options can help employees feel confidence that their money isn’t all going in one direction, smoothing out any unexpected ups and downs that might occur in the financial market.
Think Long Term to Ensure Financial Futures
The most essential thing to remind employees is sticking to a long-term strategy. In fact, every single market decline of more than 20% since 1928 has seen a positive market 12 months later. By setting a clear future retirement date with employees, even if that date needs to be adjusted, long-term investing gives more time for potential growth and for a portfolio to absorb the ups and downs of the markets over that time span. Advisors should discourage employees from selling during a down-turn and to stick with their predetermined long-term strategy.
This approach will keep employees feeling reassured even when news headlines and market reports may be overwhelming or concerning. Some employees have taken advantage of retirement plan withdrawals and CARES Act provisions to get them through this difficult time. Part of thinking long term is, when possible, using retirement plan withdrawals as a last resort. This is one area where advisors can offer value – helping employees think through the long-term effects of pulling money from their plan now.
Even though market swings can be a worrisome for people, advisors should help stress the importance of sticking to a long-term investment plan to employees, emphasizing the safety of their retirement savings over time. Check-in with employees routinely, at least on an annual and regular basis, to review and rebalance investment plans based on any changes that might occur in their financial or personal lives. Volatile markets can change the proportion of funds in different asset classes, but rebalancing allows employees to reset an investment portfolio.
Advisors play an important role in reminding employees that market volatility isn’t something to cause alarm when investments are accurately planned around a desired retirement date, major life goals and a personal risk tolerance. Advisors can also contact their plan service providers for additional support and resources, as many offer communications that can be shared with employers and employees. By encouraging employees to keep a diversified portfolio and helping them focus on a long-term investment strategy, not only can they be better protected against market volatility, but more importantly, they can remain on track to meet their retirement goals.