June 24 — Retirement plan sponsors and participants should listen to their brains rather than stomachs in reacting to market drops after the U.K.'s referendum vote to exit the European Union, a pension investment adviser told Bloomberg BNA.
There's much “uncertainty following the vote and we are all without the benefit of a crystal ball that can tell us for sure how this will all play out,” said Joe Goldberg, principal and director of retirement plan services for Buckingham Asset Management and the BAM Alliance in St. Louis.
Our brains are telling us that when markets are down, we should invest more, while our stomachs tell us that it's time to get out, he said June 24.
Goldberg said defined contribution plan participants, such as those in 401(k) plans, should ask themselves one simple question as they consider how to respond to this and all other unanticipated market events: Do I believe that investment markets will be higher when I need to spend the money I have at risk? If the answer is yes, they can ignore all the noise around them. If no, then they already should have the money stashed in safe investments.
Defined benefit plan sponsors should ask themselves the same question, Goldberg said. These plans should have consultants in place to assure that the plan has sufficient assets in safe investments so it can meet its short-term payout needs. With those needs met, these plans can continue to put a portion of their assets at risk to meet the plan's future liabilities, he said.
Defined contribution plan participants “hopefully are already invested at the right level of risk for their circumstances,” Goldberg said. Any money they know they will need to spend in the next five to 10 years should be in safe investments, he said. Such investments could include money market funds, stable value funds or short-term bonds.
Typically, plan participants get distressed when they look at their plan investment statements and see a drop in value, Goldberg said. Participants would be better off viewing these statements as having several buckets, one for safe investments and one for those at risk, he said.
For example, take a participant who has 60 percent of plan assets in stocks and 40 percent in safer investments, and the person gets a plan statement showing the account has lost 20 percent, Goldberg said. A participant should view the statement as showing that the money needed to be spent in five or 10 years is stashed in the “safe investment bucket,” he said. The participant shouldn't care much that the money in stocks or the “at-risk investment bucket” has declined, as those investments may not be needed for 20 or 30 years, he said.
In fact, Goldberg said that participants who are still in the accumulation phase of their retirement should be “jumping up and down” during periods of market drops. With each contribution they make, they will be buying investments at a lower price, he said.
Periods of stock market decline provide evidence that market risk is real and justify the higher long-term returns that stock markets deliver, Goldberg said. If there wasn't any risk in the market, stocks would have returns equivalent to the low returns of bonds and retirement investors would need to save much more than they currently do to have assets adequate for their retirement, he said.
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