Considerations for Your 401(k) During Volatility

Boat

When market swings dominate the news, it’s easy to get anxious. A sure way to heighten your concern is to check your 401(k) balance. Current market conditions can be sobering—but for most of us, this should just be one stop on a long journey.

If you can’t stand to sit tight, focus on these five steps to help channel your worries in a more productive manner:


Five Things to Consider for Your 401(k) During Volatility

1. LOOK BEFORE YOU LEAP

For many investors, moving out of equities into some other supposedly safe haven may not make sense. You know that selling low and buying high is typically the opposite of how investors strive to invest, right? Selling stocks today implies that you will be able to buy them at a lower price in the future. But do you really think you’ll be able to spot the market’s ultimate low? The market can roar back in a buying frenzy, leaving those in cash sitting on the sidelines.

2. CONSIDER TARGET DATE FUNDS

Target date funds maintain a methodical (read that: unemotional) approach designed to invest more of your assets in equities earlier in your career, when you have more time to make up for any short-term losses. As you get closer to retirement, target date funds generally move more of your assets into fixed income and cash-like vehicles. The goal is to make your nest egg less vulnerable when you’re getting ready to tap it for retirement income.

3. SEEK ADVICE FROM A REPUTABLE SOURCE

If you have access to a financial planning advice provider, consider getting a second opinion before making any big changes to your asset allocation. Like target date funds, advice providers should make decisions based on scientific principles, not fear or greed.

4. CONSIDER INCREASING YOUR CONTRIBUTIONS

You may look back on this time as a missed opportunity to add to your equity holdings. Increasing your 401(k) contribution rate is almost always a good choice. Now, it may make even more sense as a cost-effective way to buy into the markets over many years.

5. NAME YOUR PRICE

If you think you must reduce your equity holdings, make a plan for re-entry. Consider setting two prices: One that’s lower than where you sold, and another that’s higher. If the market doesn’t fall to the “smart move” price, better to buy back at the “oh, well” price than to give up growth potential.


Time is On Your Side

Most of us have years—perhaps even decades—when we can sell off equities. So why make any big moves now? Instead, take a moment to consider more effective and rational actions that might get better results in the long run.

Or just do nothing. This is one time when not taking action might make the most sense.

Scott Dingwell is a Director in BlackRock’s Global Client Group where he serves on the U.S. and Canada Defined Contribution Team. He writes about retirement for The Blog.

 

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-16435

Do Commodities Deserve a Place in Your Portfolio?

Gold

One of the bedrock principles of wealth management is diversification. Proper diversification can mean lower overall risk without lowering your portfolio’s potential returns. So alternative asset classes like commodities, which refer to everything from crude oil to wheat to gold, would seem to be a key tool in achieving this venerated idea of a fully diversified portfolio.

Yet commodities have been the worst-performing asset class so far this year, and their underperformance isn’t a short-term blip. Commodities have been trending downward for about 5 years and have fallen by more than 10% in 3 out of the last 5 quarters. Given these mediocre results, do commodities deserve a long-term allocation in your portfolio?

Unfortunately there’s not a simple “yes” or “no” answer to that question. Commodities don’t move in lockstep with more traditional investments such as stocks and bonds, so including commodities in a portfolio tends to increase the portfolio’s diversification. But commodities are also a very volatile asset class. Whether the additional diversification outweighs the high volatility depends on what else is in the portfolio and also what return commodities will provide.

Estimating what return commodities will provide, even over very long periods of time, is difficult. Since commodities are the inputs that go into producing the goods we use, it’s reasonable to expect commodity prices to rise roughly in line with the inflation rate over the long term. But commodity funds typically don’t hold physical commodities. They get exposure to commodities by buying commodity futures, which are financial products whose values are based on commodity prices.

Over the long term the returns from investing in commodity futures aren’t actually that closely tied to the changes in commodity prices. More esoteric factors, such as the difference between current commodity prices and futures prices and the returns from the bonds used as collateral when buying the futures, tend to be more important. In recent years, with the rise of commodity exchange traded funds helping to drive up futures prices and with the low interest rates that have persisted since the global financial crisis, the results from investing in commodity futures have been disappointing.

These two trends—strong demand for commodity futures from exchange traded funds and low interest rates—aren’t likely to disappear overnight, but they’re also unlikely to last forever. So at some point commodities will become a more rewarding investment than they have been in recent years. Yet given the intricacies of investing in commodities, making sure you understand exactly what factors will affect your investment’s performance is critical. Commodities can help diversify your portfolio, but in some cases the costs of that diversification outweigh the benefits.

The Latest Projections for the Global Economy

IMF Global Growth

The world is struggling economically. In its latest World Economic Outlook, the International Monetary Fund (IMF) projected that the global economy would grow by about 3% this year. In early 2014, by contrast, it was projecting that global growth in 2015 would be almost 4%. Most of this decline was related to emerging markets.

In early 2014 the IMF was projecting that emerging economies would grow by 5.4% this year, but it now projects only 4% growth. The decline in its projection for developed economies (including the US) from 2.3% to 2% was much smaller. The dramatic deceleration in emerging economies is a large part of the reason why emerging market stocks have struggled so far this year.

Yet these disappointing statistics don’t necessarily mean you should avoid exposure to emerging market stocks in your portfolio. It’s important to remember that there’s only a very weak relationship between a country’s economic growth and its stock market performance. It’s well known that growth in many big emerging economies is slowing, so this information is likely already incorporated into stock prices. And some effects of sluggish economic growth—such as weaker currencies, lower inflation, and less wage pressure—could actually help some stocks.

The IMF’s projections show emerging market economies bouncing back to 4.5% growth next year and 5.3% growth by 2020, so they’re not completely dire. These projections of a quick rebound may prove too optimistic, particularly the IMF’s belief that China will be able to maintain a growth rate above 6%. But even if emerging economies continue to sag, it’s very possible that emerging market stocks could do well. Despite economic weakness, keeping a globally diversified portfolio is still a good idea.

Can Central Banks Help Push Stocks Higher?

Pole Vault

Investors may be feeling a bit of “déjà vu all over again,” to quote the recently departed Yogi Berra. As the fourth quarter kicks off, amid scarce evidence of global growth, equity investors are once again looking to central banks for largesse and monetary stimulus to help push stocks higher.

While stocks ended the third quarter with their worst performance since 2011, according to Bloomberg data, a renewed reliance on central banks was evident in last Friday’s sudden stock market turnaround. As I write in my new weekly commentary, “As Growth Slows, Markets Seek Comfort in Old Friends,” the Dow Jones Industrial Average swung from a 250-point loss to a 200-point gain on Friday after U.S. investors treated a weak jobs report as a sign the Federal Reserve (Fed) will hold off on raising interest rates, according to Bloomberg.

Investors in other countries are also following suit, similarly exhibiting this shift in the investment regime. European equities stand to benefit from a recent weak inflation point, which may prompt further quantitative easing by the European Central Bank. A similar pattern is evident in emerging markets such as India, where last week stocks benefited from an unexpected rate cut from its central bank.

Growing concerns over the health of the global economy are manifesting in several ways, as data accessible via Bloomberg show. A broad measure of financial stress, the Global Financial Stress Index, recently hit its highest level since the summer of 2012. In addition, with investor risk aversion climbing, so-called high-beta, momentum names that are more volatile continue to suffer. For example, at the lows last week, the Nasdaq Biotech Index was down nearly 30% from its July high, according to data accessible via Bloomberg.

How a global slowdown may impact the U.S. economy

Though I don’t believe a U.S. recession is on the horizon, it’s becoming clear that the U.S. isn’t immune to the global slowdown. Not only was the September jobs gain number roughly 50,000 below expectations, but the August payroll numbers were revised lower as well. In addition, hourly earnings were flat and the labor participation rate fell to its worst level since 1977.

Meanwhile evidence continues to suggest that the U.S. manufacturing sector is struggling under the weight of a strong dollar and feeble overseas demand. As a result, second-half growth is likely to be considerably slower than the nearly 4% we witnessed in the second quarter, and a more pessimistic outlook for the U.S. economy is pushing back expectations for a Fed hike and driving down short-term yields.

So what does this mean for investors going forward? As we have seen in recent years, in a world where the Fed keeps rates anchored at zero, stocks benefit, if only because they compare favorably to cash and negligible bond yields. Finally, in such an environment, some old themes, such as a preference for income-producing equities, come back into vogue as investors gird for an even longer spell of “low for long” rates.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

 

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-16823