What you need to know: Keeping your
investment plan on track during times of market volatility

This special update focuses on what’s currently driving market volatility, how you can weather the market swings, and what this may mean for your financial plan. We begin with insights on what’s driving the markets and then follow with some key steps you can take in terms of your investments and your financial plan by TIAA, FSB Chief Portfolio Strategist, John Canally, and Chief Financial Planning Strategist, Dan Keady.

Market and economic outlook: a rough start

It’s been a rough start to 2022. Stocks and bonds have both been down for the first time in 40 years. Stocks are down nearly 20% year-to-date. However, that shock needs to be tempered by the realization that we had three years of above-average returns preceding 2022. In the first half of this year investors worried about stagflation, recession, inflation, the Fed, and that lead to significant declines for stocks and bonds.

Stocks, bonds, and the Fed

Historically, the way stocks and bonds move has meant when one is up, the other is usually down. Most investors think of bonds as the hedge against a declining stock market. That was usually true – until this year. Fears of escalating inflation (which has already accelerated to the highest in 40 years) have hurt both stocks and bonds in 2022, but the bond market has taken a bigger hit.

The Fed began raising rates this year in an effort to slow inflation, and more recently the Fed raised rates a further 75 basis points mid-June. That’s the biggest single increase in twenty-eight years. There is, however, a silver lining of rising rates. “Based on our analysis, higher bond yields today set up for more normal returns, 4-5% per year on bonds over the next 10 years,” says Canally.

While the traditional relationship between stocks and bonds (one up while the other is down) remains in flux, we’ll likely need to see inflation move back to the 2-3% range, and labor markets loosen before the historical relationship between fixed income and equities re-asserts itself.

Over the past several weeks we’ve seen numerous signs that inflation has peaked as energy and other commodities have weakened, home sales have slowed, and retail sales have ebbed. While the Fed will likely hike rates several more times this year, the market and the Fed are largely aligned on interest rate policy in 2022. Moreover, there is mounting evidence that their efforts are having the desired effect and a return to market normalcy is not that far away.

Putting a volatile market in perspective

It’s also helpful to put the current market sell-off in historical perspective. Figure 1 below shows just how far the markets have come since the lows of March 2020, despite recent pullbacks in both stocks and bonds.

Since the 34% decline in U.S. stocks* triggered by the pandemic in early 2020, even with the current sell-off, U.S. stocks were up 75% on a cumulative basis through June 2022.

*US stocks represented by the Russell 3000 index. The Russell 3000 Index is a capitalization-weighted stock market index, maintained by FTSE Russell, which seeks to be a benchmark of the entire U.S stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America as measured by total market capitalization, and represents approximately 98% of the American public equity market.

Volatility will continue, but let’s put it in context...

You cannot invest directly in any index. Index returns do not reflect a deduction for fees or expenses. Past performance is not a guarantee of future results.

The S&P 500® Index is a market capitalization-weighted index of the 500 leading companies in leading industries of the U.S. economy. It is widely recognized as a guide to the overall health of the U.S. stock market. The index focuses on the Large-Cap segment of the market, with over 80% coverage of U.S. equities. 

When you include the significant market gains in the years leading up to 2020, the U.S. stock market posted well-above average gains in 2019, 2020, and 2021.

Taking the right steps to weather volatility. What can investors do?

Taking the right action – or even just staying the course – is emotionally hard to do. Working with an advisor and utilizing professional portfolio management can provide the guidance, counterbalance, and confidence to help you stay on track towards your long-term financial goals.

So, what can and should investors do? While there are many strategies and actions one can take, according to TIAA, FSB Chief Portfolio Strategist, John Canally, there are six keys to help investors manage through, and even potentially take advantage of, market volatility:

1. Have a sound financial plan

“Helping investors achieve their objectives based on their individual situation remains our priority. During times like this it is important to revisit your risk tolerance and short and long-term financial needs," says Dan Keady, TIAA Chief Financial Planning Strategist. "Specifically, is your plan still appropriate? Have you experienced a change in your circumstances that would warrant revisiting it? And, once in place, are you able to stick with it? It is all about having a concrete plan and having confidence in your plan and your advisor."

"A big takeaway from 2020, and now again in 2022, is that the world can change in an instant," said Keady”. After significant events – in the market or your life – Keady believes it's important to re-evaluate your goals and priorities to make sure you can continue to protect what's most important to you," he notes. "That includes reviewing your investment strategy, as well as the safeguards in place to protect your income, loved ones, and property."

A key benefit of the planning process is the ability to stress test your strategy for significant downturns like what we saw in February and March 2020, and again this year. "These events are taken into account when we create your plan," Keady said. "That allows us to identify gaps or vulnerabilities in your planning and address them before events like this occur."

How to strengthen your plan

Anchoring yourself in a plan provides an opportunity to prepare for unforeseen, unexpected, or negative events. Planning helps ensure the amount of risk you’re taking is aligned with your goals, time frame, and risk tolerance. Your TIAA advisor can help.

2. Diversify your investments to match your tolerance for risk

Most investors understand that to effectively manage risk, portfolio investments need to be spread among a well-diversified mix of securities. That may include stocks of small and large companies, U.S.-based and international equities, short- and long-term bonds, and both international and domestic bonds.

Effective diversification takes a number of factors into consideration, including the correlation between markets (what markets are up, which are down), asset classes and investment types. It also includes whether holdings are actively or passively managed, as well as your personal goals, risk tolerance and investment time frame, among other criteria. However, simply owning a lot of different assets is not enough. In addition to the number of securities you own, you want to determine if underlying holdings overlap—resulting in double or triple ownership in the same investment types or asset classes, which can undermine your strategy.

“For example, if you own an index fund that invests in a large number of U.S. stocks, you may enjoy a degree of diversification across U.S.-based companies”, said Canally. “However, when U.S. stocks fall all at once—that provides little overall protection for your portfolio.”

The chart below shows the ranking of individual asset class by investment returns from high to low from 2007-2021. What quickly becomes clear is that it is determining the winners (or losers) in any given year is next to impossible. That’s why diversifying your investment across asset classes is so important.

During times of uncertainty, diversification is key.

Now look at the next chart. The blue line across the chart represents the annual return of emerging market stocks, which is at the top during some years and at the bottom for others. As the chart illustrates, in years when emerging market equities were doing well, such as 2005 – 2007, other sectors, such as bonds, were struggling. But look at 2008, which marked the start of the Great Recession. Bonds were the top performing sector that year while emerging markets performed the worst. Fast forward just one a year to 2009, and they reverse places again, with emerging markets back on top.

Even in uncertain times there are winners and losers – anticipating them is virtually impossible.

Finally, look at the next chart. We’ve drawn a line through the historical returns of a diversified portfolio of 60% stocks and 40% bonds. While not the winner in any given year, the returns are much more stable.

The moral of the story? If you were solely invested in any single asset class over the past 15 years, you were in for a wild ride. That's why diversifying your investments across a wide variety of asset classes—as opposed to concentrating in just a few holdings—improves the likelihood that, on balance, you will have a positive overall return, or at least a less negative return.

A well-diversified portfolio improves the likelihood of more consistent outcomes

60/40 diversified portfolio vs. individual asset class returns. Chart indicating the fluctuation in performance of a 60/40 Equities and Fixed Income portfolio, and overall annualized returns and volatility level of a 60/40 Equities and Fixed Income portfolio from 2007 to 2021.

"This relative stability is why, even when markets are down, a properly diversified portfolio can improve the likelihood of achieving your goals and provide a smoother ride along the way," Canally said. To achieve that end, it's critical to align your diversification strategy with your goals, the time frame for achieving them, and how much risk you're willing to take as an investor to accomplish them. Of course, past performance is not a predictor of future performance.

How to create a strategy to ride out a rough market

Make sure that your plan provides a level of downside protection when the market shifts away from today’s top-performing sectors. Diversifying your investments across a wide variety of asset classes, investment types, and money managers may provide a smoother ride along the path to your goals.* Talk your advisor to plan your strategy.

3. Stay invested and avoid the temptation to time the market

Clearly, the investment returns you earn are important. However, far more important is being invested in the first place. Whether your investments return 6% or 16%, if you're not invested, it really doesn't matter. Even the most experienced investors can find themselves making emotionally-driven decisions during unusually turbulent periods, which can result in trying to time the market's ups and downs. The problem with market timing is that you have to make at least two decisions: When to get out and when to get back in. Both are very difficult to get right. For example, if you sell stocks when they're down, you may lose out on gains when prices go up again. That’s because, historically, the stock market has recovered from slumps over the long term, although past performance is no guarantee of future results.

Why staying invested matters

6/30/1999 – 6/30/2019 The returns are average annual returns over the past 20 years. The bars represent what would have happened if you’d “missed” the best 10/20/30/40/50 days for the equity markets during that 20-year period. Past performance is no guarantee of future results. This is for illustrative purposes only, and the returns are average annual over the past 20 years. This is not indicative of any investment. An investment cannot be made directly in an index. The S&P 500 index is based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. ©2018 Morningstar. All rights reserved.

How staying invested to help meet your goals

Investing, staying invested, and avoiding market timing – even in tough markets like today’s - is key to helping make sure you work toward your financial goals. Talk to your advisor about how TIAA’s managed accounts help do this for you.

4. Rebalance to stay well-positioned and in step with your risk tolerance

As markets shift over time, a strategy that includes regular portfolio rebalancing is critical for managing risk. That's because market swings can throw your target allocation, that is, how you allocate your investments across different asset classes to achieve the balance between risk and return, out of alignment with your goals and risk tolerance, creating the need to rebalance your portfolio.

When your target allocation becomes misaligned with your goals, you can rebalance by moving money from investments that take up a greater portion of your portfolio than desired into those that could use a boost—to get back to your target allocation.

For example, the steep downturn in the stock market in early 2020 caused allocations to equities to shrink. If you refilled that equity bucket, it helped position portfolios to take greater advantage of the upswing in the second half of the year and beyond – a recovery of around 75% from the March 2020 lows through the end of June this year.

The opposite is true after an extended period of stock market outperformance. The chart below illustrates the concept of rebalancing after strong stock market performance caused the portfolio to be significantly overweight in U.S. and international stocks, and underweight in real estate and bonds in this example.

Rebalancing helps keep your strategy on track...

Depending on the number of investments you have and the size of your portfolio, rebalancing can be challenging to do on your own.

How to rebalance to help stay on track – the value of professional management

Your TIAA advisor can help you determine if and when your portfolio needs shoring up, so it remains aligned with your risk tolerance and long-term objectives. Keep in mind, rebalancing does not protect against loss or guarantee that an investor's goals will be met.

5. Build an investment plan mindful of taxes

While achieving gains in an investment portfolio is an overarching objective, paying more taxes on those gains is not. That’s where you may benefit from tax-loss harvesting¹. It’s a proactive approach of selling investments that have unrealized losses to offset capital gains that may have been realized during a calendar year—that can help reduce your tax burden. The significant downturn in both equities and bonds so far in 2022 has provided opportunities to harvest investment losses and store them up in the event gains materialized later in the year.

How to manage your investment-related taxes

Tax-loss harvesting can be somewhat complex depending on the size of your portfolio and the degree of diversification you have in place. Enlisting the help of a tax professional and your financial advisor can help ensure your approach to managing your investment tax bill is fully aligned with your short- and long-term goals.

6. Create a lifetime income stream to help provide a floor to meet essential expenses

As a general rule, covering 2/3rds of your expenses (see the chart below) in retirement with sources of guaranteed income can put in place an income foundation. This can reduce stress and help ensure that you are in a good position to maintain your lifestyle, even during times of extreme market volatility. "When we talk about lifetime income, we're talking about creating a dependable income stream you can't outlive using your various income-generating assets in retirement," Keady says.

These include Social Security, a pension (if you have one) and fixed annuities, which provide guaranteed income. These income sources combine to create a foundation to ensure your essential needs are met for food, shelter, clothing, transportation, and healthcare over a period of 20 or 30+ more years in retirement.

The role of fixed annuities

Fixed annuities, which provide guaranteed income,² can play a significant role in helping to create a buffer against market volatility for those still accumulating assets, as well as those taking income from their portfolios in retirement.

While much attention has been focused on the severe stock market downturn, bond funds have experienced unprecedented declines. However, during the same period, fixed annuities did not fall in value. Instead, they increased in value by the interest they earned.

Guaranteed income has provided a lot of stability for people since their portfolios rose by the amount of interest they earned during that period. That continues to be important in the current environment where lower bond market returns are expected to persist for some time. Keady believes that the key to weathering any market or economic storm is having that "ballast" in the ship to help keep it afloat when rough seas are encountered.

"Being able to see guaranteed income in your portfolio during times of increased uncertainty can also provide a positive impact from a psychological perspective," he said. "For many people, that can help keep emotions in check when the markets become increasingly volatile."

The "2/3 point of view"

The two thirds point of view. Circle chart describing the percentages of retirement income you should consider potentially consider targeting from Social Security, traditional portfolio withdrawals, and from fixed or variable annuities.

How to make guaranteed income a part of your retirement planning

Making guaranteed income a part of your portfolio during times of increased uncertainty can also provide a positive impact from a psychological perspective. For many people, that can help keep emotions in check when the markets become increasingly volatile. Talk to your TIAA advisor about how guaranteed income can be part of your retirement planning.

What’s the bottom line?

We continue to expect a difficult market environment for the rest of this year for both stocks and bonds. But remember, we’ve just come off three well-above average years for stocks and bonds in 2019, 2020, and 2022. Inflation likely peaked in the first quarter, but markets and the Fed want to be sure. The market has already priced in another 175 -200 bps of rate hikes this year. The economy and earnings growth is already cooling off and may slow further as the year progresses. TIAA’s managed accounts are positioned in light of this view, and remain well-diversified. Behind the scenes, portfolio managers conduct ongoing monitoring of portfolios, conducting tax-loss harvesting and rebalancing as market conditions warrant.

Want to learn more?

Your TIAA advisor can review your investments and financial plan with you to help make sure you’re taking all the right steps to minimize the impact of market—while helping stay on track to pursue your financial goals.

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