Summer 2008

Stay the Course: Keeping Plan Participants Focused on the Future

By Wellington Management

As a plan sponsor, you know as well as anyone the impact that market volatility can have on employees who are investing for their long-term goals. As you guide your plan participants through these volatile times in the market, here are a few time-tested guidelines to consider and pass along.

More Positives than Negatives

Stock markets go up and down, sometimes taking investment returns with them. Historically, however, stock returns have more often been positive than negative. The key to weathering the storm may be for participants to start investing early, take a long-term view, and remain invested.

Over the last 50 years, the S&P 500 Index experienced 39 years of positive annual returns and only 11 with negative returns. Furthermore, the average annual return was 12.3%. Even the MSCI World Index, which some consider more volatile since it includes non-US stocks, has had 29 years of positive annual returns compared to 9 negative years since its inception in 1970.*

Make Time an Ally

Although in the short term the market may swing between highs and lows, it has historically been steadier over longer periods. Figure 1 represents the best and worst annualized returns of the S&P 500 Index for all possible one-, three-, five-, and ten-year periods over the past 40 years. As you can see, the gap between the best and worst returns gets smaller the longer the time period. In fact, the worst ten-year period return is positive at 1.3%.*

Here's another way to look at the potential benefits of a long-term focus: An investor who invested $10,000 in 1967 and remained invested for 40 years would have accumulated $1 million, assuming the historical returns of the S&P 500 Index.* And that's without making any additional investments.

Don't Let Emotions Affect Investments

Emotions are a powerful driver of behavior, and can exert undue influence on investment decisions. For example, euphoria in the market led to overinvestment by some people in technology stocks in the late 1990s, just as investor despair may have led to underinvestment in other areas of the stock market during recent periods of volatility. In both cases, unchecked emotions may have led to investment mistakes.

Generally, a well-diversified portfolio built with a long time horizon should not be altered significantly because of short-term changes in the market. Pulling money out of the market simply because of short-term volatility may increase the risk of missing market gains. Figure 2 shows how average annual returns would have been affected by missing the best days in the market over the past 30 years.

Start Investing Now and Keep Contributing

For participants who aren't fortunate enough to own a crystal ball, market timing should generally be avoided. Instead, they should consider focusing on dollar cost averaging (DCA), or making periodic investments of the same amount. DCA will help ensure that participants will buy more shares when prices are down and fewer when prices are up. Over time, this strategy may lead to greater wealth accumulation, take the guesswork out of investing, and provide a more meaningful strategy than simply avoiding stock investments.

For example, if an individual invested $10,000 at the beginning of 1968 and invested an additional $5,000 each year for 40 years, using the historical returns of the S&P 500 over that time period, she would have accumulated more than $4 million by the end of 2007.* It is important to note that continuous or periodic investment plans neither ensure a profit nor protect against loss in declining markets. Because DCA involves continuous investing regardless of fluctuating price levels, participants should carefully consider their financial ability to continue investing through periods of fluctuating prices. This example is hypothetical and for illustrative purposes only.

Conclusion

Focusing on long-term objectives and personal risk tolerance may help participants maintain a systematic investment plan and stay invested. Over time, stock markets have trended upward and produced three times as many years of positive returns as years of negative returns.* Although the years with negative returns may feel difficult, taking the long-term view may pay off in the end.

* Past performance is no guarantee of future results. Index performance is provided as a benchmark and is not illustrative of any particular investment. An investment cannot be made in an index.

Disclosure: Wellington Management Company, llp is an independently-owned, SEC-registered Investment Adviser which, along with its subsidiaries and affiliates (collectively, Wellington Management) provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in: Atlanta, Georgia; Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Hong Kong; London; Singapore; Sydney; and Tokyo.

This material is prepared for, and authorized for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorized by Wellington Management Company, llp or its affiliates. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.