Why You Should Keep Your Equity Sails Flying by Scott Dingwell, BlackRock
Rethinking whether equities have a place in your 401(k)? Scott Dingwell shares some points to consider before you jump ship.
If you’re saving for retirement, the idea of getting a 0% return on your stock market investments for a full year is downright painful. But that’s what happened to me, and millions of Americans during 2015. If you were in the U.S. equity market for the calendar year 2015, you got a lump of coal in your stocking at year end.
With the increasing drum beat about rising interest rates, I know that many investors are tempted to jump ship. Why leave money in equities, and risk another year of lost opportunity, when fixed income securities seem to be on the road to higher (and less risky) returns?
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I’m always dismayed how many people view saving in their 401(k) as a race, where the object is to move from fund to fund in a continual effort to pick the fund with the best performance. But switching out of stocks because the news has been bleak implies some sort of ability to forecast markets, and guessing what the stock market will do over the short to intermediate term is near impossible. The fact that very few professionals are market timers (or successful market timers) confirms that difficulty.
How to prepare for the investing journey ahead
Saving for retirement reminds me of a race where you know where you’re heading, but the conditions you’ll face along the way are anyone’s guess. Perhaps a good analogy would be a long transoceanic sailing race. You hope it will be all sunny skies and brisk winds, but you know there will be periods where there’s no wind, and you’ll drift backwards. The best you can do is set off with a range of sails that should work in a variety of conditions. Strong, durable sails for strong winds and large, lightweight sails to capture faint breezes. Of course it would also be nice to have a motor that will help you along when winds disappear.
This analogy works pretty well when it comes to my 401(k). The “sails” in my portfolio are various asset classes. I don’t know when each one will be the best performing asset class, but I feel better knowing I have diversified my portfolio to take advantage of whatever the markets throw at me.
Taking a closer look at equities and stock funds
So how much should you allocate to your equity ‘sails’? Although many of us just pull a percentage out of thin air, professionals use software to calculate the optimal equity percentage based on a given time frame. For those who don’t have portfolio optimization software just lying around, I have an easily accessible alternative: If your savings plan has target date funds as an option, find the target date fund that matches your time frame, and see how it allocates assets to equities. Not only will this give you an idea of how much you should consider to have invested in equities, it may also help you determine how to diversify between different components of the equity markets (small versus large, domestic versus international). Another option would be to see if your plan has an advice service, where you can get individualized advice for your specific time frame and financial profile.
Battening down the hatches by investing for the long haul
Just as sailors have relied on ocean winds for centuries, stock market returns have been fairly reliable providers of long term account growth. Although it’s frustrating to endure months of market malaise, the reality is that the only way to get long term market returns is to be in the market long term!
And the motor? Well, I have one ‘investment’ that has a positive return each and every year. In many respects, my own contributions, and those of BlackRock, my employer, are a great investment in my savings success. No matter what the market has done, I can always rely on my account benefiting from the commitment I’ve made to max out my savings each and every year. Sure, I’d prefer that most of my account growth comes from the markets, but it’s great having two sources of propulsion!