2022 Down Markets: Costly Investor Mistake and The Powerful Growth Opportunity

For investors, the year 2022 has been quite the challenge, as markets are experiencing some of the worst performance in decades. The year has brought a significant amount of uncertainty due to sticky inflation, risk of U.S. recession, a war in Europe, residual COVID-19 supply chain crises, and the weakening of corporate profits from eroding consumer optimism.

For many investors the previous market declines in our past have become a distant memory, including the 2008 housing market collapse, the dotcom crash of 2000, and the market crash during early 1970s. More recently the 2020 market decline taught investors some valuable lessons about staying invested during the selloff rather than make an irrational emotional response to the temporary market conditions, specifically when COVID-19 first arrived in the U.S.

In addition to these lessons learned, the uncertainty in the market during this time also presented opportunities for investors to take advantage of, specifically within retirement plans, if they increased their contributions when stock prices were down. It is an important strategy that investors with a long-term investment horizon can incorporate to potentially reduce the negative effects and potentially maximize gain opportunities for individual retirement portfolio values.

It is important for investors to remember that it is simple to stick to an investment strategy when markets are performing well, and that it takes real fortitude to weather the underperforming markets when they are present. The long-term effects of prematurely selling out of positions are more significant than the short-term losses in most cases.

As a retirement investment advisor, one of the most common narratives that I hear from participants is, “I should move to a more conservative portfolio and reduce my contribution amount during the market volatility, until things straighten out.” In most cases, this is usually the exact opposite of what we would recommend to investors during these short-term volatile markets, especially within a retirement account. Addressing these two narratives are critical for participants to hear from their investment advisor.

Emotional Selling Can Be Very Costly to Your Retirement Account

First, in addressing the thought process off moving to a more conservative portfolio when markets are down, it is important to understand the consequences of loss aversion. It is commonly expressed that most individuals feel the pain of losing twice as much as the pleasure of gaining, and this is especially true within individual finances.

The thought to get more conservative during and after the downturn, and then aggressive again when markets are up, is essentially selling low and buying high, which is the opposite of what investors should aim for.

Selling out of a portfolio and into a more conservative portfolio locks in your investment loss up to that point, and then limits your ability to capture the upside when markets begin to correct themselves. Most individuals with a longer time horizon, usually more than five years, will more than likely ride the market back up if they stay true to their investment allocation.

Increasing Contributions and “Buying the Dip” Can Be a Powerful Growth Opportunity

Retirement accounts present a unique opportunity for individual investors, in that in most circumstances payroll contributions are automatic and consistent. In down periods it means that you are buying when the market is low, enabling your ability to “dollar cost average". This strategy aims to spread out purchases of investments; so ultimately, your total price paid should be less affected by market timing.

Maintaining your contributions or even increasing them during down markets should provide the opportunity to reduce your overall dollar cost average and have a larger share value for when the markets begin to correct themselves. This larger share value allows you to recapture your investment losses faster, as well as gain more than someone who would reduce or stop contributing altogether.

As mentioned before, it tends to be easy to stay true to an investment strategy when markets are performing well and difficult when markets are down. In most cases, individuals who can weather the bad periods and stay true to their investment allocation and contributions have a better chance of outperforming those who do not.

If you find yourself debating making an allocation change and you have 5, 10, 20, or even 30 years until retirement, it is encouraged to solicit more advice from your SDWMA Retirement Plan advisor.

As always, for individuals who are closer to retirement (within the 5-year window), it is always a great time for you to have a deeper discussion with one of your SDWMA Retirement Plan advisors.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

About Schneider Downs Retirement Solutions

Schneider Downs Retirement Solutions has experience in all facets of qualified and non-qualified plan delivery, which allows us to be flexible to the needs and direction of our clients. Our specialized team of advisers and consultants provide objective advice and expertise to help plan sponsors govern their retirement plans appropriately, mitigate risk, improve participant outcomes and support efficient and compliant plan operations.  

To learn more, visit our dedicated Retirement Solutions Solutions page.