Capital Ideas^™ 
Investment insights from Capital Group

The fallout from volatile markets can have a lasting impact on plan participants’ retirement objectives. Fear may lead them to invest too conservatively, which could limit the growth of their retirement assets.

By helping participants understand how to balance the risk factors impacting their investments, you can help ease their concerns. This could put them in a better position to achieve retirement security.

Common questions from participants

As your participants face this uncertainty, they may come to you for guidance about how to prepare for a volatile market. This can be an opportune time to reframe conversations about navigating risk as they pursue their retirement goals. Here are some typical questions your participants may ask:

Past market downturns really scared me. I want to avoid risk. What are the safest investments that can help me retire?

Reiterate that with investing, there is a tradeoff between risk and reward. The more risk participants take—by heavily weighting their portfolio toward growth stocks, for example—the greater their potential to achieve higher returns. The more they try to avoid risk by over-allocating to cash and ultra-safe government bonds, for example, the harder it could be for them to achieve their goals within their desired timeframes. Help them understand the potential benefits of a diversified portfolio and how their time horizon to retirement could influence their investment allocations. Explain the potential benefits of a managed solution, such as a target date fund, that can provide direct diversification aligned to a participant’s retirement timeline.

Is it riskier to invest outside the U.S.?

The answer: not necessarily. Tell participants that an allocation to international investments could reduce risk by increasing diversification. Foreign markets often move based on different market cycles than those in the U.S., or in reaction to events in the U.S. Investing abroad may offset some of the effects of a U.S. market drawdown, helping to smooth out participants’ overall pattern of returns and reducing portfolio volatility.

Also explain that some of the largest and most successful companies are based overseas. Many are multinationals with a meaningful share of their sales and operations outside of their home countries, giving investors exposure to a broad range of consumer markets.

However, there can be unique risks associated with investing outside the U.S., such as currency fluctuations, periods of illiquidity and price volatility. These risks may be greater with investments in developing countries. 

What does a diversified portfolio look like and why is it important?

A goal of long-term investing may be to take on enough risk so that a participant’s portfolio has the potential to grow but not so much risk that a slump in the market might derail their retirement plan.

A diversified portfolio may hold a mix of stocks, bonds, cash and other types of investments. Explain that a key point is to select investments whose returns have not historically moved in the same direction at the same time and to the same degree. With a diversified portfolio, dissimilar assets should respond differently to economic events, such as inflation, interest rate changes and geopolitical events. Diversification is important because it helps spread participants’ risk across different types of investments, which may increase their chances for investment success.

Successful investing does not mean avoiding all risk or completely ignoring risk. Rather, it involves striking the optimal balance between the right amount of risk for participants and their individual circumstances and the portfolio growth they need to achieve their retirement goals.

Tips for success
 

• Help participants understand the different types of risk. When participants think of risk, they might focus solely on declining asset prices. However, it is important to realize that there are other types of risk that can impact the ability of investors to achieve their objectives, such as interest rate, inflation and longevity risks.
  
  
• Emphasize the importance of time. When participants have more time to invest, the chances are greater that they will be able to recover from a market downturn. Conversely, the closer an individual is to retirement, the greater the potential for a market dip to jeopardize their ability to retire. Remind them that it is important to consider remaining invested, especially during volatile periods. Pulling retirement assets out of a volatile market can short circuit the benefits of compounding, a critical driver of long-term returns. Time in the market — not market timing — is what matters over the long run.
  
  
• Encourage portfolio diversification and rebalancing. A diversified portfolio can help smooth participants’ returns in a volatile market and prevent concentrated exposure to any single source of risk. Because allocations may grow or shrink over time depending on market cycles, however, routine rebalancing is important to keep allocations and risk exposure in check.

Investing principles like these are at the heart of the investor education that Capital Group has provided for retirement plans and financial advisors for many years. We have a wealth of educational materials to help plan sponsors educate participants and can provide educational support at benefit fairs, participant presentations and other events.