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9 ways to achieve your long-term plan

Key takeaways

  • If you've sold your investments due to market ups and downs, reinvesting can help get your plan back on track.
  • Staying disciplined with your saving and investing is key to helping account balances recover and achieving your long-term goals.
  • A financial plan is helpful when everything is booming but it's critical in economic downturns.
  • Stress test your plan to see if it's still on target for your goals.

When the stock markets start to slide, it can be difficult to stay invested. But time and again, financial professionals have cautioned that falling markets can turn on a dime when things seem only slightly less bleak than the day before. Historically, every severe downturn has eventually given way to further growth.

This graphic shows the S&P 500 Index since 1985. Though significant downturns like the Dot-Com bubble and the Global Financial Crisis were hard to stomach at the time, the market recovered and moved on.
Source: Fidelity Investments. Past performance is no guarantee of future results. See footnote 1 for details.

No one knows when the next market downturn will happen, how long it will last, and what the recovery will look like. But we do know that these patterns have played out in similar ways in recent market pullbacks. Days with unimaginable losses have sometimes been followed quickly by days with large gains. Eventually, the market has historically gotten through these periods and gone on to produce positive returns—the largest of which often come right after big selloffs.

After significant corrections, in which the market is down less than 20%, stocks have historically returned an average of 30% one year later. For the year following a bear market, which sees the market down 20% or more, the average historical return has been 37%.
Returns were calculated using daily market returns for the S&P 500 for the time period following the market low after each correction and bear market from 1950 to 2022. Source: Fidelity Asset Allocation Research, as of June 30, 2022. Past performance is no guarantee of future results. The impact of taxes and fees are not considered in this hypothetical illustration.

Steps to consider now

Consider these 9 ways to make sure your retirement saving and investing plan is on track through down markets so you're positioned to benefit from potential growth later.

1. Try to stay disciplined with your investing

Staying invested through downturns can seem counterintuitive but it can be key to benefiting from potential rallies and the long-term growth potential of the stock market. Missing just a few of the best days in the market can undermine long-term return potential.

Not missing any days would have resulted in $1.06 million. Missing just the 5 best days in the market would drop the total 38% to $656,000. Missing the 50 best days would result in a total of just $76,000. Results have been rounded the nearest thousandth.
Past performance is no guarantee of future returns. Source: FMRCo, Asset Allocation Research Team, as of June 30, 2022. See footnote 2 for details.

Here are 3 actions that an investor saving for retirement could have taken during the Global Financial Crisis in 2007–2009 and the long-term effect on their savings.

Give up: Sell all stocks and stop making contributions.

Bail out: Sell all stocks and leave the money in cash, but keep saving.

Stick with it: Don't sell. Continue making new workplace contributions and stick with their investment plan, including annual rebalancing.

As you can see, continuing to save and invest through the Global Financial Crisis would have helped the investor's account recover from the downturn and take advantage of subsequent growth.

The data in the chart is described in the text.
It took 52 months for investments to return to the highs set before the Global Financial Crisis. The chart assumes that the hypothetical investor entered the downturn with 70% stock/30% bond mix, an account balance of $400,000, and a baseline annual contribution to the workplace plan of $15,000. The decision to move to cash in this example was triggered by a 20% decline in the market from the recent high. See footnote 3 for more information. Source: Fidelity Investments

2. Work to maintain a diversified investment mix

Setting and maintaining your diversified asset allocation are among the most important ingredients in your potential long-term investment success. Though diversification and asset allocation won't ensure gains or guarantee against losses, they may smooth out returns for the level of risk you choose to target.

Read Viewpoints on The guide to diversification

When the market fell in 2020, the 60/40 portfolio experienced less of a decline than the S&P 500 Index. Both were indexed to 0 at the beginning of February of 2020.  The 60/40 mix dipped slightly over 20% while the index fell nearly 35%. By June of 2021 the 60/40 mix was up 20% relative to the Feb. 2020 baseline and the index was up 29%.
The 60/40 investment mix experienced less volatility than the S&P 500. Daily data. Source: FMRCo, Bloomberg, Haver Analytics, FactSet. S&P 500 and Barclays US aggregate. Data as of June 2021.

3. Consider reviewing investments at least annually and rebalancing as needed

Big shifts in the market can throw your plan off its track. For instance, if you had a portfolio with about 60% stocks and about 40% bonds in January 2020, the portfolio would have been closer to 52% stocks by the end of March 2020. That might mean your portfolio has less growth potential than planned. Rebalancing back to your investment mix can help ensure that your plan stays on target with your long-term asset allocation.

As a general rule, Fidelity suggests rebalancing if your mix of stocks, bonds, and cash veers more than 5%–10% from its target weight in your portfolio, resulting in more or less risk than your plan calls for. It can also be a good idea to evaluate your investment mix if your life goals change.

Read Viewpoints on Give your portfolio a checkup

4. Already sold out of the market? Think about reinvesting

Seller's remorse can happen to anyone. If you've sold all your investments and are currently on the sidelines, it can be difficult to catch up. But there's good news: You can reinvest. Because stocks have typically experienced volatility heading into and during recessions, investors have had opportunities to acquire stocks at discounts to their previous valuations.

Historically, when stocks have recovered from their recession levels, they have typically delivered strong returns. So even though it can be disconcerting to invest when the economy is shaky and markets are down, the growth potential has historically benefited investors who stuck with their investments through the recession or started investing during that time.

The data in the chart is described in the text.
For illustrative purposes only. Recession dates from the National Bureau of Economic Research (NBER). Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. See footnote 4 for index information. S&P 500 index monthly total returns from 12/31/49 to 12/31/19. Source: Bloomberg Finance, L.P.

If jumping back into the market seems too risky now, consider a dollar-cost-averaging strategy by putting a set dollar amount into a portfolio each month. While dollar-cost averaging won't insulate you from losses or guarantee a profit in a volatile market, investors can purchase more shares when prices are lower, and fewer when they are higher. But for dollar-cost averaging to be effective, an investor must continue to make investments in both up and down markets.

5. Look for opportunities to cut taxes

When investing outside of tax-advantaged accounts (like an IRA, 401(k), or HSA) the taxes generated by investments may lower your after-tax returns.

Strategies like tax-smart asset location or tax-loss harvesting may help reduce the impact of taxes.

  • An asset location strategy can help ensure that your investments are held in accounts where you pay the lowest possible taxes.
  • Tax-loss harvesting may allow you to offset taxes on realized gains. And, if you have more capital losses than gains, you can use up to $3,000 a year to offset ordinary income on federal income taxes, and carry over the rest to future years.

Read Viewpoints on How to invest tax-efficiently

6. Evaluate your emergency fund

Generally, while you're working and saving for retirement, it's a good idea to keep 3 to 6 months of essential expenses in cash or cash-like investments (for example, a money market fund). As you move toward retirement, building up your cash savings to cover a year or more of essential expenses may help you feel more comfortable and prepared for the unexpected. Feeling more prepared for downturns can help you stay invested for the long term.

7. Try to maximize savings

If you're able to increase the amount you're saving toward your long-term goals, saving more may help offset the impact of market downturns. You may also be able to buy more of your investments in a downturn. If nothing else, a market downturn may be an opportunity to revisit your plan and confirm that your investment mix and the amount you're saving are in line with your time horizon, risk tolerance, and financial situation.

8. Stress test your plan to see if it's on target

After big stock market swings, review your plan to understand if it's still on target. If it's not, there may be steps you can take to get back on track.

Consider Suzie, a hypothetical 45-year-old saver. Before the downturn in 2020, her Fidelity retirement score was 97%, meaning she was on track to cover 97% of her expected expenses in retirement. After stocks dropped 25%, her score dropped 6 percentage points to 91%. The Fidelity retirement score estimates the percentage of income your retirement savings could replace in retirement.

This is illustrated in the graphic below. The first 4 columns represent the factors that make up Suzie's current retirement score. In the fifth column, the red bar indicates the impact of the market downturn on that portion of the current retirement score.

Is your retirement plan on target? Find out with the Fidelity retirement score

The good news is, Suzie has options. She has time to increase her savings before retirement. Staying invested appropriately for her time horizon also contributes to her overall readiness for retirement. If Suzie were invested too conservatively or stopped saving, her retirement score would go down far more than what resulted from the market pullback.

The data in the chart is described in the text.

IMPORTANT: The projections or other information generated by Fidelity Retirement Score regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. The Fidelity Retirement Score is a hypothetical illustration and does not represent your individual situation or the investment results of any particular investment or investment strategy, and is not a guarantee of future results. Your score does not consider the composition of current savings and other factors.

The first 4 columns represent the factors that make up the current retirement score, in the fifth column. The red bar indicates the impact of the market downturn on that portion of the current retirement score.

This hypothetical illustration assumes Suzie, the saver, is 45 years old and planning for retirement at age 65. Her current income is $100,000 and annual estimated retirement expenses are assumed to be $70,000. The value of her retirement savings is $500,000 with a 15% annual contribution, including the match from her employer. Her savings are invested in 70% stocks and 30% bonds. Based on the assumed work history, pre-tax Social Security retirement benefits are assumed to be $27,000. For the complete methodology used in this example, see footnote 5.

The Fidelity retirement score estimates the percentage of a retirement income goal that a user or household is estimated to replace in underperforming market conditions. View the complete Retirement Analysis Methodology (PDF).

9. Nearing retirement? Review your investments and create an income plan

As you near retirement, your time horizon may be changing. To help get ready, consider these steps.

Review your asset mix. Your personal situation and financial plan are the critical factors in your investment decisions. But it can often make sense to reduce the amount of stocks in your investment mix in order to reduce the level of exposure to stock market risk as you move toward retirement when you'll begin withdrawing from your investments.

Build a diversified income plan. To help ensure that you're able to cover essential expenses, consider a layered approach to your retirement income. That can mean using guaranteed sources of income—like Social Security, pensions, or annuities6—to cover fixed expenses such as housing. That way, your investment accounts are funding discretionary expenses. That can give you the flexibility to pare back the spending from your investment accounts during down markets if it makes you more comfortable.

To learn more, read Viewpoints on 3 keys to your retirement income plan

In the short term, extreme market fluctuations are painful. But over time, they may have much less of an impact on long-term goals than one might fear. That's because focusing on the things you can control, and continuing to save and stay invested with a diversified plan, can have an even bigger impact on the outcome.

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1. The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation. S&P and S&P 500 are registered service marks of Standard & Poor's Financial Services LLC. The CBOE Dow Jones Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. You cannot invest directly in an index. 2. The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation.

3. Investment horizon is defined as from prior US stock market high, to the bottom and then to the recovery to the prior high. The investment is considered "under water" during this entire horizon. The hypothetical investor moved to cash or/and stopped contribution at an emotional trigger, which is defined as US stock market drop 20% from prior high, which is commonly defined as bear market. Monthly returns of below indexes are used. Stocks: 1926-Jan 1987 US Large Cap Stocks; DJ US Total Market Feb 1987-Present Bonds: 1926-Dec 1975 US Intermediate Bond; Barclays Agg Bond Jan 1976-Present Short-Term: 1926 - Present IA SBBI US 30-day T-Bill

The Ibbotson Associates SBBI 30 Day T-Bill Total Return Index is an index that reflects US Treasury bill returns. Data from the Wall Street Journal are used for 1977–present; the CRSP US Government Bond File is the source from 1926 to 1976. Each month, a one-bill portfolio containing the shortest-term bill having not less than one month to maturity is constructed.

4. The S&P 500® Index is an unmanaged, market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to present U.S. equity performance.

Dow Jones US Total Stock Market Index is a float-adjusted market capitalization–weighted index of all equity securities of US headquartered companies with readily available price data.

MSCI ACWI (All Country World Index) ex USA Index is a market capitalization-weighted index designed to measure the investable equity market performance for global investors of large and mid-cap stocks in developed and emerging markets, excluding the United States.

Bloomberg Barclays US Aggregate Bond Index is a broad-based, market-value-weighted benchmark that measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market. Sectors in the index include Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS.
5. Hypothetical investor Suzie is 45-years old and working. She makes $100,000 a year and contributes 15% (including employer match) to her retirement. She plans to retire at age 65. The estimated annual retirement expenses are assumed to be $70,000 (based on income replacement rate; she lives in MA; uses single as tax filing status; and is considering FICA in pre-retirement income. Rounding down to the nearest $5,000, her expenses are assumed to adjust annually with a 2.5% rate of inflation during retirement. The value of her retirement savings is $400,000 in a 401(k) account and the pre-tax value of Social Security benefits is $27,000 (assuming she is single and claims at age 62, rounding down to nearest $1,000, 70% taxable, adjusted annually with 2.5% inflation during retirement). Her savings are invested in 70% stocks, 25% bonds, and 5% cash. And a 16% total effective tax rate is assumed during her retirement.

Market drawdown is assumed to be 25% drop in the stock market. Portfolio drawdown is a product of market drawdown and stock allocation of the portfolio, rounding down to nearest 1%.
6. Guarantees are subject to the claims-paying ability of the issuing insurance company.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Investing involves risk, including risk of loss.

Indexes are unmanaged. It is not possible to invest directly in an index.

Past performance and dividend rates are historical and do not guarantee future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

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