Are Market Losses Real?
Imagine a magical website where you could type in your home's address, and when you do, the current value of your home instantly appears. In 2007, after years of price appreciation, you looked pretty smart… not so much after the housing meltdown and great recession of 2008-09.
Few people would immediately sell their home after observing a dramatic decline in their home’s value, yet that is exactly what many are tempted to do when facing market declines in their workplace retirement plans.
During periods of extreme volatility, watching retirement account values decline can certainly be troubling, particularly for those with larger balances. This may lead some to lament, “I’ve lost a lot of money.” Instead of lamenting, remember this old adage: It is not a loss until you sell the shares.
This tenet may seem basic, but even seasoned workplace retirement plan investors need this reminder.
When investing in equity mutual funds, you become an owner of an asset - shares of the companies held by the fund. Although the number of shares owned remains constant, their value does not. Instead, it fluctuates. As an owner, we hope shares appreciate in value over time. As we have witnessed recently, however, sometimes this is not the case.
In the face of market volatility, some may even wonder why they bother investing in stock funds within their plan. Despite this frustration, equities provide the potential for greater returns over the long haul, leading to more money for your future.
In the meantime, maintaining a diversified mix of all asset classes helps smooth the ride. If you are more than ten years away from retirement, you still have plenty of time to ride out market fluctuations. If you are retiring soon, make sure to create a thoughtful downshifting strategy away from equites based specifically on your time horizon, not on recent market events.
As an asset owner, watching your retirement account value fluctuate is challenging. Keeping a long-term perspective will help you ride out the current market roller coaster.