In January, Fidelity Investments released its analysis of the retirement landscape for the fourth quarter of 2018. Hidden behind data and statistics on savings trends was some incredible news: Last summer, there were over a million people with more than $1 million in their 401(k) accounts.
And then came December, in which nearly 20% of the value of the S&P 500 was wiped out; markets overseas also grappled with larger losses. This dip in the market dropped the number of 401(k) millionaires by 28% in the fourth quarter of 2018.
What should we take away from this event? Is it proof that we should avoid investing in stocks altogether, especially when faced with market volatility?
No — it’s actually the opposite. The reason stocks have higher expected returns compared to more conservative investments is because they require you to take on additional risk. This is precisely why there were so many 401(k) millionaires in the first place.
Market volatility is normal, but it still keeps many investors from trusting their retirement savings to stocks. On the other hand, the investors who are able to stay resilient and weather volatility are often rewarded with higher long-term returns.
Imagine a world in which stocks provided a tranquil, low-risk/low-return pattern over the long term. Investors would receive modest overall returns, because returns are a direct function of risk. In this low-risk, hypothetical world, it’s likely that many investors would never achieve their retirement goals.
Of course, those investors who desire less risk can find it in markets like Treasury bonds, which offer a modest return with little risk and a high expectation of delivering on the nominal returns they promise. But Treasuries are not completely free of risk, either; from a historical perspective, the 10-year government bond market has experienced declines of as much as 5%. And chances are, few of the 401(k) millionaires referenced in Fidelity’s report were heavily invested in Treasuries during their accumulation periods.
The point is that risk is a normal aspect of investing in the financial markets. There’s no denying that it can be difficult to stomach periods of significant market volatility — and there is no crystal ball to tell us when those periods will occur. At Empyrion, we believe that your best defense against market ups and downs is a disciplined, diversified investment philosophy you can rely on, one that factors in a long-term horizon and matches your tolerance for risk at various stages of your life.
If you have questions about your investment strategy or want to talk more about your risk tolerance, we encourage you to contact us.
Stay Diversified, Stay Your Course!
