Balancing Act: Managing Market Volatility in Your Washington DCP and Personal Retirement Accounts
Seth Deal, CPA
Financial Planner Helping State & Local Gov. Employees in Washington Become Financially Independent By Maximizing Their Pensions & Benefits
As a Washington state public employee, you're building a secure financial future through your pension, the Deferred Compensation Program (DCP), and personal retirement accounts. But with the constant ebb and flow of the stock market, you might be wondering: How can I protect my retirement savings from market volatility? Let's dive into strategies to help you navigate these choppy waters and keep your retirement plans on course.
Understanding Market Volatility: The Retirement Rollercoaster
Market volatility is like a rollercoaster - it has its ups and downs, twists and turns. While it can be unsettling, it's a normal part of investing. Here's what you need to know:
Volatility doesn't mean loss: Short-term fluctuations don't necessarily translate to long-term results.
Time is on your side: The longer your investment horizon, the more time you have to ride out market fluctuations.
Emotions can be your enemy: Panic selling during downturns can lock in losses and make it harder to recover.
Your Washington DCP: A Powerful Tool in Volatile Times
The Washington State Deferred Compensation Program (DCP) is a voluntary supplemental retirement savings plan designed to help you build added retirement security [1]. Here's how it can help you manage market volatility:
1. Diversification Options
The DCP offers a range of investment options, allowing you to spread your risk across different asset classes [2]. This diversification can help cushion your portfolio against market swings. The target date funds are also diversified.
2. Dollar-Cost Averaging
By contributing to your DCP through regular payroll deductions, you're using a strategy called dollar-cost averaging [3]. This means you're buying more shares when prices are low and fewer when prices are high, potentially lowering your average cost per share over time.
3. Professional Management Options
DRS offers professionally managed funds, including target date funds, which automatically adjust their asset allocation as you approach retirement [4]. This can help manage volatility without requiring constant attention from you.
Personal Retirement Accounts: Your Custom Volatility Shield
In addition to your DCP, you might have personal retirement accounts like IRAs or a taxable investment (brokerage) account. Here's how to manage these effectively in volatile markets:
1. Asset Allocation: Your Personal Shock Absorber
Your asset allocation - the mix of stocks, bonds, and other investments - is crucial in managing volatility.
Generally, the closer you are to retirement, the more conservative your allocation should be [5].
Review your asset allocation semi-annually. Rebalance to maintain your target mix.
2. Diversification: Don't Put All Your Eggs in One Basket
Spread your investments across different:
Asset classes (stocks, bonds, real estate)
Size (large cap, small cap)
Growth and Value
Geographic regions (U.S., international, emerging markets)
Remember: While diversification doesn't guarantee profits or protect against losses, it can help manage risk [6].
3. Cash Reserves: Your Financial Cushion
Having a cash reserve can prevent you from selling investments at inopportune times to meet short-term needs.
Aim for 3-6 months of living expenses in easily accessible cash [7].
If you’re planning on using investment funds within the next 5-10 years consider calculating how much you will be using and move these funds into high quality, short duration bonds.
Whether you're managing your DCP, IRA, or both, these strategies can help you weather market volatility:
1. Stay Invested: Time in the Market Beats Timing the Market
Historically, staying invested through market cycles has been more effective than trying to time the market [8].
From 2000 to 2019, missing just the 10 best days in the market would have cut your overall return in half [9].
2. Rebalance Regularly: Maintaining Your Risk Profile
Market movements can throw your asset allocation out of balance compared to your original allocation. Regular rebalancing helps keep your desired risk level.
Best Practice: Rebalance at least semi-annually or when your allocation drifts more than 25% from your target [10].
3. Use Tax-Loss Harvesting (for Taxable Accounts)
In taxable accounts, selling investments at a loss can offset capital gains and reduce your tax bill. This strategy, known as tax-loss harvesting, can turn market downturns into tax-saving opportunities [12].
The wash-sale rule prohibits claiming a loss on a security if you buy the same or a "substantially identical" security within 30 days before or after the sale [13].
4. Use Tax-Gain Harvesting (for Taxable Accounts)
In taxable accounts, selling investments at a gain will increase your tax basis (cost) and reduce future capital gains. Be aware, if your current tax rates will be lower in the future or the same, this strategy may not make sense for you.
Emotional Strategies: Keeping Your Cool in Volatile Markets
Managing your emotions is just as important as managing your portfolio. Here's how to stay level-headed:
1. Avoid Constant Monitoring
Checking your accounts too often can lead to emotional decision-making.
Limit yourself to reviewing your accounts quarterly or semi-annually.
2. Focus on Your Goals, Not Short-Term Performance
Remember why you're investing in the first place - for a secure retirement, not to outperform the market.
Instead of focusing on account balances, consider whether you're on track to meet your long-term goals.
3. Understand Your Risk Tolerance
Your ability to stick with your investment strategy during market turbulence depends on your risk tolerance. Think about how you felt during recent market downturns. Were you worried, the market was going to zero? Or where you not concerned. Your risk tolerance can drastically shift as you get closer to retirement so be sure to re-evaluate your risk tolerance as you get closer to retirement.
Special Considerations for Near-Retirees
If you're within 5-10 years of retirement, market volatility can be particularly concerning. Here are some strategies to consider:
1. Gradual Shift to More Conservative Allocation
Start shifting to a more conservative asset mix, but don't abandon growth investments entirely. You may need your money to last 20-30 years in retirement and inflation will be an issue during that time frame.
2. Build a Bond Ladder
Consider creating a bond ladder to provide predictable income in the early years of retirement, reducing your reliance on selling stocks in a down market [15].
3. Consider a Bucket Strategy
Divide your portfolio into near-term, medium-term, and long-term buckets, each with appropriate investments for its time horizon [16].
Your Action Plan: Mastering Market Volatility
Ready to take control of your retirement savings in the face of market volatility? Here's your action plan:
Review Your DCP Allocation: Log into your DCP account and review your current investment mix. Does it align with your risk tolerance and time horizon?
Check Your Personal Accounts: Review the asset allocation in your IRAs and other personal retirement accounts. Rebalance if necessary.
Assess Your Cash Reserves: Ensure you have adequate cash savings to avoid selling investments in a downturn.
Consider Professional Advice: Consider scheduling a consultation, or work with a financial advisor who understands the unique aspects of public employee retirement planning.
Educate Yourself: Take advantage of educational resources offered by the DRS. Knowledge is your best defense against panic during market turbulence.
Stay the Course: Unless your personal circumstances have changed, stick to your long-term investment strategy. Remember, retirement saving is a marathon, not a sprint.
Remember, market volatility is a normal part of investing. By understanding it and having a solid strategy in place, you can navigate these choppy waters with confidence. Your future self will thank you for staying the course and building a secure retirement, come rain or shine in the markets.
Sources:
Washington State Department of Retirement Systems, "Deferred Compensation Program," 2024.
Washington State Department of Retirement Systems, "DCP Investment Options," 2024.
U.S. Securities and Exchange Commission, "Ten Things to Consider," 2024.
Washington State Department of Retirement Systems, "DCP Target Date Funds," 2024.
Financial Industry Regulatory Authority, "Asset Allocation and Diversification," 2024.
U.S. Securities and Exchange Commission, "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing," 2024.
Consumer Financial Protection Bureau, "An essential guide to building an emergency fund," 2024.
Vanguard, "Time in the market vs. timing the market," 2023.
J.P. Morgan Asset Management, "Guide to the Markets," 2023.
Vanguard, "Best practices for portfolio rebalancing," 2023.
Internal Revenue Service, "Roth IRAs," 2024.
Internal Revenue Service, "Topic No. 409 Capital Gains and Losses," 2024.
Internal Revenue Service, "Wash Sales," 2024.
NASDAQ, "Investment Risk Tolerance Quiz," 2024.
Fidelity, "Bond ladder basics," 2024.
Schwab, "Bucket Strategy," 2024.
Fee-only financial planning and investment advisory services are offered through LifeFocus Financial Advisors, LLC, a registered investment advisory firm in the state of Washington.
This article content is for informational purposes only and does not constitute investment advice. The views and opinions expressed in this article are solely those of Seth Deal and do not necessarily represent the views of LifeFocus Financial Advisors, LLC.
Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results.
Please note that the information provided in this article does not take into account your specific financial situation, objectives, or needs and is not intended as a recommendation to purchase or sell any specific securities or investment strategy. Before making any investment decisions, we recommend consulting with a qualified financial advisor and reviewing our Form ADV Part 2A, which provides important information about our qualifications, services, fees, and business practices. This disclosure brochure is available on our website or the SEC's website at www.adviserinfo.sec.gov.
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