Reframe & refocus: Seeing the ‘good-side’ of market volatility

Row of 3 sprouting plants

Russell Investments’ strategist team is expecting markets to be volatile throughout the remainder of 2016. This can be unnerving for investors because it can make things feel like they are out of their control. By helping clients reframe this point of view and refocus their attention on the factors they can control can be both helpful and rewarding.

Help clients focus on what they can control

Help clients refocus their attention on the variables they can control, such as their savings and spending behavior. After all, financial decisions your clients make today will impact their ability to successfully replace their income in the future. As we explore in the most recent edition of the Investor newsletter, a little bit of additional savings can go a remarkably long way. And what better time to begin saving more than during times of market turbulence. In any other walk of life, a drop in prices is called a “sale” and attracts consumers. Why should it be any different in the realm of investing?

The power of one percent

Consider 3 hypothetical investors who have each been saving 10% annually since they were 25 years old, and plan to continue at that pace until they retire at age 67. What if they each saved just 1% more of their salary each year? How would this potentially impact their income in retirement?

1 percent chart

Assumptions: Salary grows by 3% per year until age 40, then by 2% per year until age 50 and by 1% per year until retirement at age 67. The multi asset portfolio is allocated 80% stocks and 20% bonds, earning on average 7% per year until age 40; 60% stocks and 40% bonds, earning on average 6% per year, until age 65; 40% stocks and 60% bonds portfolio, earning on average 5% per year, until retirement. Mortality tables for U.S. female is applied for Alice and for U.S. male is applied for Peter and Robert. Inflation is 1.5% throughout the entire period. The potential additional yearly income in retirement is based on the size of the nest egg, inflation expectations, mortality table and a liability discount rate of 3.5%. All dollar amounts are expressed in today’s dollars, are pretax and are rounded for simplicity. For illustration only.

By foregoing the equivalent of one dinner-and-a-movie per month to invest for retirement, Alice, Peter and Robert may be able to give their retired selves more options. The additional income could allow them to contribute to grandchildren’s educational expenses, give back to their community or go on an extra vacation. Of course, there are no guarantees in investing. Depending on how the markets perform, the hypothetical investors’ respective additional yearly income in retirement may be higher or lower than the amounts listed in the graphic above.

The bottom line

Volatility or not, decisions we make today will impact our ability to successfully replace our income in the future. When we allow uncertainty to derail disciplined financial plans, we run the risk of cheating ourselves out of a more secure future. Consider sharing the latest edition of the Investor newsletter with your clients to help them make good decisions – and then help them stick with those decisions.

Portfolios comprised of stocks, bonds and real assets can have unique risks based on the asset classes, investment styles, market sectors and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal.

The general information contained in this publication should be not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.

Copyright © Russell Investments 2016. All rights reserved.

Russell Financial Services, Inc., member FINRA, part of Russell Investments.

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