The coronavirus pandemic has caused an economic crisis all over the world, from record levels of unemployment to disruptions in the workforce, such as forced vacation time and the loss of corporate benefits. In addition, many individuals were affected by the fall in the stock market, especially people approaching retirement who may now feel like they need to hold off on that decision.
Younger workers may also be worried about the dip in the stock market since they likely saw the value of their portfolios decrease sharply. While you may be worried about what this drop means for your savings and ability to retire, the market has a long time to recover if you are decades away from retirement.
Why You Should Focus on Time Rather Than Markets
Investors often pay attention to the smaller, daily shifts in the market, especially if they have a large portfolio. For most millennials, their retirement account is likely the largest investment account they own. However, tracking your account daily can cause unnecessary anxiety, particularly since you have no power over the market. Market fluctuations are outside the control of the individual investor—and recognizing that is important.
Even more important is understanding what you can control. The thing that millennials have control over is time. Daily fluctuations can create stressful swings in the market, but investments tend to produce reliable and consistent returns over time, which is the key to maximizing retirement savings.
Younger investors should not spend too much time trying to find the next Apple or Amazon stock or even timing the market to get the best deals or sell when a stock is high. These approaches are risky and can put overall retirement savings in jeopardy. Historically, the key to achieving excellent, long-term results is investing early and at regular intervals. The specific allocations of investment matter less when taking a long-term view, which is exactly how you should approach your retirement savings.
In some ways, this fact should provide relief for anyone stressed about market performance, especially in light of the recent drop. The equation for saving adequately for retirement does not factor in market performance, but rather how often and how much you save in your retirement account.
The Importance of Thinking about Retirement in Terms of Savings
In some ways, you may want to think about your retirement account more in terms of saving than investing. Investing relies largely on the behavior of others, which is something outside of your control. However, saving is entirely up to you.
To get the most out of a retirement account, you need to be disciplined and understand the power of time rather than focusing on the small peaks and valleys of the market. The most important factor is saving early and regularly. This takes advantage of compounding interest, which is the real path to adequate retirement savings.
We can easily come up with tons of reasons for holding back on our contributions to retirement accounts, but it is this procrastination rather than the market performance that will keep us from meeting our goals. When it comes down to it, you cannot make up for decades of under-saving. While there are some methods of catching up, they often require making significant sacrifices and saving large amounts of money to account for the lost compounding time. This is why you should start saving as early as possible and prioritize the amount you put into your account. Getting started early allows even small amounts of money to grow at exponential rates, which is the power of compounding.
A Framework for Thinking about the Advantage of Time
Anxiety is common when it comes to investing because so much is outside of our control. This fact makes it even more important to exercise the little control that we have. Becoming an expert on the market takes a lot of time and is realistically a full-time career. However, you can become an expert on the things you have control over relatively easy.
Time can be a scary thing, but it can also become empowering. On the one hand, the unknown can feel overwhelming. On the other, time gives you a significant advantage and allows flexibility and control. With time, you can make changes to your portfolio and saving habits to ensure you set yourself up for success.
In many ways, saving for retirement is like the fable of the tortoise and the hare. In this analogy, the hare would be more interested in using investments to jumpstart its retirement savings. This shortcut method can cause people to run into significant issues and potentially make it impossible to retire according to the plan. The tortoise is analogous to the person who saves steadily over time. This person slowly but consistently builds wealth and moves closer to their goals with each passing year. Just as in the fable, slow and steady wins the race. People who focus on time virtually guarantee their success without exposing themselves to undue risk.