Ups and Downs of the Market

In the investing arena, change is constant. Stock and bond markets are going to fluctuate. Everything from corporate earnings reports to mergers to economic indicators has an impact. It may be difficult to look at your retirement plan balance after a bad day on Wall Street, but it’s important to keep ups and downs in perspective.

Historically, over the long term, the stock market trend has been up. From 1996 through 2015, for example, the average annual return for large-company stocks has been about 11 percent. For 10-year Treasury bonds, it’s been over 7 percent.* So even though there are years when the market performs poorly, if you’re invested for the long term you likely have time to ride out those down periods. (Past performance is not a guarantee of future results.)

If you need help staying on course, talk to a Financial Advisor to help gain perspective.

Investing Through Market Cycles:

Do Don't
Keep your long-term goals in mind and ignore daily fluctuations. Panic. If there is a market downturn and you sell, you just lock in your loss. 
Be realistic about long-term returns. Follow the herd. People chasing after the "next hot stock" often end up buying as the price goes up, which may lower your returns.
Rebalance and reallocate your portfolio in response to your changing goals, timeline and risk tolerance, not in response to temporary market cycles. Stop contributing to your retirement plan if the market is down. If anything, a market downturn is a good opportunity to buy stocks essentially on sale.

*Large-company stocks are measured by the S&P 500. Past performance is not an indication of future results.

Inflation and Interest Rate Fluctuations

Changes in the inflation rate—the cost of living as measured by the Consumer Price Index—likely have been modest during most of your lifetime. The average annual inflation rate from 1985 through 2015 was less than 3 percent. Since 2000, it’s averaged just over 2 percent according to the U.S. Bureau of Labor Statistics. 

Interest rates have also been historically low in recent years, largely due to the Federal Reserve Board’s monetary policy. The Fed has been keeping short-term rates low in order to help stimulate the economy.
Here is a look at how inflation and interest rates could affect your finances now and in the future.

Inflation: An Increase in the Cost of Living

Inflation is the rise in consumer prices. Although deflation—a drop in overall prices—can also occur, it’s unusual.

When inflation is low:

  • The price of everyday items tends to be stable.
  • Employees may see small or nonexistent raises. 

When inflation is high:

  • Prices tend to rise overall.
  • Earnings may not keep up with the cost of living.
  • Retirees on fixed incomes may lose buying power.

It’s important to keep future inflation in mind when saving for retirement. For example, even with low rates of inflation, you would need almost $14,000 today to have the same buying power as $10,000 in 2000. 

Interest Rates

Short-term interest rates are influenced by the Federal Reserve Board. These are the rates that affect most consumer loans and credit card rates. Long-term interest rates tend to be influenced by the price of bonds and generally affect mortgage rates.

  • When interest rates are low or going down
  • Borrowers may benefit by lower rates on auto and personal loans.
  • Homebuyers may benefit with lower mortgage rates.
  • Businesses may be able to invest more in expansion, employment and equipment.
  • The price of existing bonds goes up, since new bonds may pay lower rates.
  • Savers are at a disadvantage because rates on savings accounts and certificates tend to be low.

When interest rates are rising:

  • Consumer credit and mortgage loans become more expensive.
  • Businesses may curtail spending.
  • The price of existing bonds may go down, since new bonds may pay higher rates.
  • Financial institutions tend to pay higher rates on savings and certificates.

Both interest rates and inflation can have an impact on the stock market, but it’s not always obvious. For example, if the Fed indicates it may raise interest rates, the market may go down if investors fear higher rates will have a negative impact on the economy. However, the market may go up if investors believe higher rates are a sign of confidence in an expanding economy. The bottom line is there are many factors affecting your portfolio’s performance that are out of your control. The ones you can control are your contribution rates and asset allocation.

Retirement Inflation Calculator

Want to learn more about how inflation could impact your retirement income? Use the Retirement Inflation Calculator to set certain variables, such as tax rates and life expectancy, and measure how increases in the cost of living affect your retirement plans.

Real Estate Fluctuations

According to the U.S. Census Bureau, the homeownership rate for Americans under 35 years old is about 34 percent, compared with about 63 percent for the total U.S. population. If you’re ready to make the dive into real estate ownership, here are a few things to keep in mind:

  • The housing bubble existed largely due to a combination of too-easy credit, low interest rates and a belief that the value of a home would always go up. Today’s buyers and lenders are more realistic.

  • Don’t count on a home as an investment for retirement. A home may appreciate, but then again, it may not. Take advantage of employer-sponsored retirement plans and individual retirement accounts for retirement savings.

  • If you’re thinking of commercial real estate as an investment, enlist the help of a real estate broker.

When real estate prices are stable or going up, they tend to have a positive impact on the economy. For example, when people are buying homes, they also tend to be buying furniture, landscaping services and appliances. So fluctuations in the housing market have a big impact on the U.S. economy and, in turn, investment returns.

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