Retirement January 26, 2016

    Market volatility can be unnerving. It tempts some investors to pull out of the market and sit on the sidelines until things calm down. But while that strategy may sound safe, it has risks of its own.

    Here are three reasons to stay invested, even during choppy markets:

    • Inflation can outpace you. Putting most of your assets in cash or safe-haven investments may make you feel protected, but if your long-term portfolio isn’t earning at least enough to cover the rate of inflation, your money could be losing purchasing power. Funds that you expect to use in the very near term should be kept in relatively stable assets, such as bank and money market accounts, certificates of deposit or Treasury bills. But for money that you intend to use for the long term, it's generally a good idea to stay invested in a mix of stocks, bonds and cash that can potentially generate greater returns (while remaining appropriate for your goals, risk tolerance and time horizon).
    • Big changes can happen fast. Sharp turns in the market—both positive and negative—often occur in just a few days or even minutes. Even professional investors rarely call them with precision, so your chances of dropping out at the market peak and jumping back in at the nadir are low. You could instead find that you've pulled out of the market right when it's turning around, and lost a chance to benefit from the upswing.
    • Potential to maximize returns. While staying invested over the long term may leave you exposed to downturns, you'll be better positioned to reap the rewards of rising markets and compounding returns when the market turns up.

    When we compared four hypothetical clients who invested $2,000 a year for 20 years, we found that investing immediately on the first day of each year, regardless of market conditions, almost always led to better outcomes. Only an investor with perfect timing—investing at the very lowest point each year—did slightly better. Bad timing—investing at the market peaks—and staying in cash-equivalent investments (Treasury bills) yielded the worst results.

    Average ending wealth in each 20-year period

    The lesson? Data shows that over the long term, it's almost always better to invest regularly, even at the worst time each year, than not to invest at all. A well-diversified portfolio—one that contains an appropriate mix of stocks, bonds, cash, and possibly other asset classes—should be in a reasonable position to weather turbulent market periods.

    If you're not fully invested yet, but are hesitant to commit all your assets at once, think about entering the market more gradually, by investing small amounts over a period of weeks or months. Often called "dollar cost averaging," this technique offers several benefits (beyond simply helping you off the sidelines). For one, it can minimize regret—if an investment proves to be poorly timed, you only own a small amount of it … and if an investment soars, you own a small amount of it. Also, by investing the same amount at regular intervals regardless of market conditions, your money will buy more when prices are low, and less when prices are higher. While this won't guarantee a profit or protect against loss in a declining market, it will eliminate the temptation to try market-timing strategies that rarely succeed.

    How Schwab Intelligent Portfolios™ Can Help

    Schwab Intelligent Portfolios recommends a portfolio of low-cost exchange-traded funds (ETFs) based on your goals, risk tolerance and investment time horizon, and can help keep your financial plan on track through automatic rebalancing. You also can set up recurring account contributions. Let Schwab Intelligent Portfolios help take the emotion out of investing, and keep you in the game—not on the sidelines.


    Investing involves risk, including possible loss of principal.

    Diversification, automatic investing, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

    Periodic investment plans like dollar-cost averaging do not ensure a profit and do not protect against losses in declining markets.

    The S&P 500 Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

    Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

    The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

    (0116-BUP0)


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