Investing in a down market can be a challenge, especially when it comes to
your retirement plan. As humans, we often follow two intellectual thought
patterns–avoiding losses and following the crowd. Heeding to these actions
in your retirement plan
could prove to be detrimental to your long-term investment goals. Let’s
identify these patterns and then provide alternatives to help propel your
Avoiding losses is known as loss aversion. This occurs when we are more
concerned with downward price movements in the value of investments than
the upward movement. An example would be when you quickly sell a position
in your portfolio based on the overall market and not the fundamentals of
that particular holding. This thought pattern spurs investors to panic and
sell an investment on the decline when they think it may be headed further
south in the short term.
Following the crowd is also known as herd mentality. This describes how we
could be influenced by the masses to act on an emotional, rather than
rational, basis. Let’s say you were deciding on where to eat dinner. You
see a restaurant that is crowded and one that is empty. Research has shown
that we are more likely to choose the crowded restaurant on the assumption
that it is better because more people are there.
Now let’s talk about helpful tools to manage these patterns and take
advantage of the
of downward volatility.
Your retirement plan gives you the perfect vehicle to continue to invest
while the market is down. This structure maintains the regular cadence to
purchase investments. Depending on your time horizon to and through
retirement, you could alter your allocation and shift to a higher
percentage in equities and invest more at lower prices. This could
ultimately be a huge benefit when you reach retirement.
Avoiding the Crowd
Another disadvantage built into our financial behaviors is following the
crowd, or herd mentality. This response to the market would go against the
advice of buy and hold. As the market moves downward, more retail and
institutional investors start to sell. Thinking that we must do the same to
avoid more losses, we sell at the wrong time. Then the market inevitably
turns upward, and we are challenged to buy back in on the upward slope.
Staying focused on the long term and not getting swayed by others will
benefit your retirement investments and your long-term results.
The other strategy to implement in your retirement plan during a down
market is rebalancing. If you have followed the advice to diversify your
portfolio, then you will have the opportunity to bring your asset
allocation back to your long-term percentages of stocks and bonds. Some
retirement plans even have a regularly timed rebalance for your portfolio.
But if not, then you should take the time to review and rebalance. This
technique will help you sell positions that are at a higher value and buy
positions that are “on sale.”
Following these strategies could be the difference maker in helping you
achieve your retirement goals.
So during the next down market, it is helpful to remember to stay
disciplined and continue to invest, be a contrarian and avoid following the
crowd, and make sure you rebalance your portfolio to fit your tolerance for
About the Author –
Michael G. Paregian, CFP®, CTFA
Michael G. Paregian, CFP®, CTFA, Senior Wealth Planning Strategist for Bryn
Mawr Wealth Management. Michael has over 26 years of financial planning and
investment experience. Michael graduated from the University of Maryland
and is a Certified Financial Planner and Certified Trust and Fiduciary