One rating agency, Standard & Poor’s, downgraded the U.S. long term sovereign debt rating one notch, from “AAA” to “AA+.” The nation’s other major rating agencies (Moody’s and Fitch) reaffirmed the U.S. AAA rating. The bonds of the U.S. government and its agencies have enjoyed top ratings since the 1940’s and have never experienced a downgrade. J.P. Morgan continues to monitor the downgrade's impact on the market.
No one knows exactly what may happen. The stock market and economy generally react to major events. Remember that investing for retirement is investing for the long term.
You’re not alone in your feelings. Financial losses are processed in the same areas of the brain that respond to mortal danger. It may be hard to think rationally, but making quick decisions now may not be in the best interest of your long term retirement plans. Investment basics still count.
There are articles and calculators on The Way Forward to help you with each of these considerations. If you are planning to retire in the next 10 years, read more about reducing risk in your portfolio.
Remember, don’t panic. With a 401(k), you’re investing for the long term. Taking money out of your plan could cost you a lot now and hurt your savings for the future. Read more about the cost of a distribution. Also, consider these strategies:
Use dollar cost averaging
By making regular contributions to your 401(k) plan, you are using dollar cost averaging, which means that when the market is high, you buy fewer shares and when the market is down, you buy more shares. Typically what happens is that your average cost per share will be lower than the average price per share.
Avoid timing the market
No one, not even the “experts,” can predict with certainty which investments will go up tomorrow and which will go down. The cost of guessing wrong can be very high, causing an investor to miss the best periods of return, which can occur at unexpected times in any market cycle.
All investing has risks. There is no one safe investment. However, asset allocation and diversification are investment strategies that may help reduce risk in your retirement account. For both, the basic principle is the old adage, “Don’t put all your eggs in one basket.” By spreading your investments among the basic asset classes of stocks, bonds and cash alternatives, it may help reduce overall volatility and cushions the overall impact of market swings because different investments react differently. Further dividing your money within each asset class (diversification) works the same way.
In short, no. By using a target date fund, all of your money may be in one fund, but within that fund, your money is spread across a wide variety of investment categories. Those investment types have different risk and return potential and may perform well at different times in the marketplace. Target date funds offer a way to be diversified by selecting only one fund. Click here to watch more about target date funds.
Target date retirement funds are made up of multiple asset classes. They are professionally managed and offer a diversified investment in a single fund. These funds are meant to align with an expected retirement date. The investment allocation will change over time. The funds will become increasingly more conservative as the target retirement date approaches. You may choose to invest in any of the other target retirement funds or any other investments in the lineup. As with all investments, the principal value of the fund(s) is not guaranteed at any time, including at the target date. You may also want to consider diversifying using the core funds in your plan’s lineup.
This type of fund typically contains bonds of the U.S. government and its agencies. There should not be any immediate impact on stable value funds since part of their structure includes wrap contracts that protect the net asset value of the fund from changes in interest rates in the underlying bond investments.
For in-depth, key market and economic information and perspectives by J.P. Morgan portfolio managers and market strategists go to J.P. Morgan on demand. (By accessing this link, you will be leaving J.P. Morgan Retirement Plan Services’ participant Web site. The information and services presented through this link are not provided by J.P. Morgan Retirement Plan Services. The information and services presented are provided by our affiliates or other entities.)
Your Money & Your Brain by Jason Zweig, editor of The Intelligent Investor for the Wall Street Journal.
“Debt, Deficit and Downgrades,” by Seth Bernstein, J.P. Morgan head of global fixed-income and currency, July 21, 2011.
An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds strive to preserve the value of the investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than original cost. Past performance is no guarantee of future results.
Stable value funds are not federally guaranteed and may lose value. Stable value funds have interest rate, inflation and credit risks that are associated with the underlying assets owned by the fund. The strength of the wrap contract is dependent on the financial strength of the financial institutions issuing the contracts.
Investment in bond funds is subject to risks, especially interest rate risk. As interest rates rise, the prices of bonds will generally fall, and vice versa.
Diversification does not assure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.
Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
Certain underlying funds of aged-based funds may have unique risks associated with investments in foreign/emerging market securities, and/or fixed-income instruments. International investing involves increased risk and volatility due to currency exchange rate changes, political, social or economic instability, and accounting or other financial standards differences. Fixed-income securities generally decline in price when interest rates rise. Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector, including but not limited to, declines in the value of real estate, risk related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The fund may invest in futures contracts and other derivatives. This may make the fund more volatile. The gross expense ratio of the fund includes the estimated fees and expenses of the underlying funds. A fund of funds is normally best suited for long-term investors.