Retirement Insights

Retirement Insights: Keep Calm and Carry On

Retirement Insights: Keep Calm and Carry On

After a remarkable run from the depths of the Covid-19 swoon, financial markets declined across nearly every asset class, sector and geography in the first half of 2022 as geopolitical strife, multidecade high inflation and shifting central bank policy weighed on investor sentiment. Though markets have offered retirement savers little respite from the broad-based turbulence, now is not the time for knee-jerk de-risking, in our view.

While short-term losses can be difficult for investors to stomach, we believe that the permanent impairment of capital—that is, the potential for investment losses that are never fully recovered—is the most serious risk retirement investors face. We also believe that the easiest way to lock in such losses is by abandoning thoughtfully constructed asset allocation plans when the going gets rough.

Plan sponsors can help participants avoid this pitfall through a diverse lineup of investment options that includes “safe havens” beyond fixed income or stable value portfolios. Equity strategies that seek to mitigate that market’s downside risk while participating in its upside may provide plan participants a way to reduce portfolio volatility without missing out on the recoveries that historically have followed selloffs.

Key Messages

  • There appeared to be no place for retirement savers to hide in the first half of 2022, as nearly every asset class, sector and geography has delivered sharp declines. While large short-term losses can be difficult for retirement investors to stomach, we do not believe that panic selling is a sensible strategy in pursuit of retirement goals.
  • In our opinion, the most prudent course of action for participants is to remain committed to a thoughtful, well diversified portfolio appropriate for their stage in the retirement journey. Trying to mitigate downside risk through timing the market has historically proven to be a recipe for disappointment.
  • Retirement plan sponsors and their wealth managers can support these efforts by providing lineups that provide complementary investment styles, philosophies and goals appropriate across a variety of macroeconomic regimes.
  • Investment strategies that take an all-weather approach may help mitigate the impact of market downturns, could allow for quicker recoveries and promote the goal of long-term wealth accumulation.

Nowhere to Hide from Market Volatility

Financial markets, already on edge from inflationary pressures and the aggressive policy tightening it was expected to inspire, were rattled further by new worries in early 2022, as Russia’s invasion of Ukraine and a new round of Covid lockdowns in China had unwelcome implications for both supply and demand globally. There has been almost no place to hide this year, as nearly every asset class, sector and geography moved lower over the first six months of 2022. This includes fixed income securities, long looked to by retirement savers for their diversification benefits and as a source of stability in volatile times. Investment grade bonds posted their worst first half in history, as the Bloomberg Barclays US Aggregate Bond Index fell 10.3%2. The ICE BofAML MOVE Index, a measure of bond market volatility, recently surpassed the highs it experienced during the tumult of the March 2020 Covid-19 risk selloff, and interest rate and spread volatility seem likely to persist until the Fed backs away from its hawkish stance.3

It’s estimated that US retirement accounts have shed nearly $3 trillion year to date4. These losses may be particularly vexing for plan participants nearing or early into retirement. While early-career savers have decades to make up for losses in their account through both contributions and portfolio appreciation, adverse market conditions concurrent with planned withdrawals may impair an older participant’s ability to generate the lifetime income they seek from their accumulated assets.

Stability, but at What Cost?

At times like these, participants at all points in the retirement journey may be tempted to de-risk their portfolios until the investment environment calms. Indeed, there is evidence some have done just that in 2022. Retirement industry consultant Alight Solutions reported 33 days of “above-normal” trading activity in the 401(k) market during the first half of this year, compared with only three for all of 2021. The impact could also be seen in the volume of the money in motion and its destination. Transfers amounted to 0.86% of starting balances in the first six months of this year compared with 0.53% for all of 2021; stable value funds attracted 74% of these assets in the first quarter and 86% in the second, taking in a total of nearly $1.5 billion, primarily from target date funds and US large cap equity.5

Stable value funds are diversified fixed income portfolios backed by an insurance wrapper that is intended to mitigate market volatility and maintain a net asset value of $1. The insurance aspect gives these products the ability to invest in a wider variety of securities and maintain longer duration compared to a money market fund, and historically they have provided about 50 basis points in excess return as a result.6 While it may be easy to see the appeal of these assets in a time of plummeting market prices, stable value funds are not without risks and fiduciary considerations, including additional fees and prolonged exit provisions. Perhaps most notably in the current environment, low-risk/low-return stable value funds could be more unlikely to keep pace with inflation rates running above 9% on headline basis, making the prospect of a positive real return from these products quite remote.7

While loss aversion is a powerful motivator, forsaking all risk in favor of stability may be akin to throwing out the baby with the bathwater—and would amount to locking in losses for those whose retirement portfolios already have lost significant value after a market selloff. Risk shouldn’t be a binary decision in our view; instead, participants may be be better served by considering strategic allocations to all-weather strategies that seek to mitigate downside risk while also participating in the market’s upside, thus promoting consistent risk exposure and the potential to compound returns over the long term.

Accepting Uncertainty

First Eagle believes the key to building retirement wealth over the long term is exposure to investments that lose less in difficult market environments, encouraging consistent exposure to risk assets and positioning a participant portfolio to recover more quickly from the inevitable periods of decline. While cash or stable value strategies may help participants feel more at ease in the short-term, the long-term disruption to their savings plans may be significant.

We cannot rule out the possibility of a prolonged period of market stagnation going forward, but neither can we dismiss the fact that recoveries historically have been unpredictable. Financial markets declined massively in the early days of Covid-19 as economies worldwide locked down only to establish new record highs the following year, for example, while the longest equity bull market in history emerged from the wreckage of the global financial crisis.

But a dramatic rebound in asset prices may not be necessary for those seeking to build long-term wealth; even sideways markets can provide opportunities. Though volatility is often equated with market pullbacks, in our experience such conditions often have corresponded with periods of choppy returns that are muted but not catastrophic—often favoring active, fundamental investors. As shown in Exhibit 1, more than half of the S&P 500 Index’s trading days in the first quarter saw absolute price moves in excess of 1%, well above the 23% average since 20108. The second quarter has experienced a comparable number of high volatility trading days. Even though year-to-date equity returns have been poor, the extreme volatility evident in both directions suggests uncertainty more than conviction; of the 63 days the S&P 500 has closed more than +/- 1% of its open during the first half of 2022, 28 were gains.9


Exhibit 1. First Half 2022 Saw Large Daily Movements—Positive and Negative—in Equities

Daily Percentage Change in Price of S&P 500 Index by Number of Occurrences, January 1, 2022, through June 30, 2022

Number of Volatile Days Chart


1Source: Bloomberg; data as of June 30, 2022.

Seeking an All-Weather Approach to Resiliency

We acknowledge that the selloff in 2022 has been difficult for retirement savers to stomach, particularly for those who are moving past the stage of wealth accumulation or are already in the income-drawing phase of their retirement journey. However, we do not believe that the short-term waxing and waning of portfolio values is the most serious risk for plan participants. Instead, we think that the biggest threat to retirement investors is the possibility of permanent impairment of capital.

In our opinion, plan participants could benefit from maintaining exposure to risk assets during challenging times in order to take advantage of the rebound that historically has come. Attempting to time the inflection points of markets is considered a fool’s errand, even for professional investors; an earlier study showed “deviations from the glide path did not improve, and may even hurt performance” of target date funds that responded to changing market conditions by adjusting their asset class exposures.

For professionals and participants alike, we believe a thoughtful strategy consistently applied may be a valuable approach to attaining retirement readiness. In our opinion, managing market risk and volatility begins with building differentiated investment portfolios that attempt to reduce short-term volatility and limit downside capture, which in turn would likely encourage participant adherence to long-term plans and promote the steady compounding of assets in real terms over time. Retirement plan sponsors can support this endeavor by providing a lineup of strategies with complementary styles, philosophies and goals that together are appropriate across myriad market conditions.

The opinions expressed are not necessarily those of the firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistic contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security..

Risk Disclosures

All investments involve the risk of loss of principal.

Past performance is no guarantee of future results.

There are risks associated with investing in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates.

A target-date fund is a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal.

A collective investment fund (CIF), also known as a collective investment trust (CIT), is a group of pooled accounts held by a bank or trust company.

Beta is a measure of the fund's volatility (risk) relative to the overall market. The higher the fund's Beta, the more the fund price is expected to change in response to a given change in the value of the market.

Standard deviation is a statistical measure of the distance a quantity is likely to be from its average value.It is applied to the annual rate of return to measure volatility.

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Upside capture is the ratio of a fund's overall return to global equity market returns evaluated over periods when equities have risen.

Downside capture is the ratio of a fund's overall return to global equity market returns evaluated over periods when equities have fallen.

Indexes are unmanaged and one cannot invest directly in an index.

Standard & Poor's 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the U.S. economy and is not available for purchase. Although the Standard & Poor's 500 Index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also considered a proxy for the total market.

Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

ICE BofA MOVE Index is a measure of U.S interest rate volatility. It is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.

FEF Distributors, LLC (Member SIPC) distributes certain First Eagle products; it does not provide services to investors. As such, when FEF Distributors, LLC presents a strategy or product to an investor, FEF Distributors, LLC does not determine whether the investment is in the best interests of, or is suitable for, the investor. Investors should exercise their own judgment and/or consult with a financial professional prior to investing in any First Eagle strategy or product. First Eagle Investments is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers.

First Eagle Investments is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers.

©2022 First Eagle Investment Management, LLC. All rights reserved.

1Source: Bloomberg; data as of June 30, 2022.
2Source: FactSet; data as of March 31, 2022.
3Source: Bloomberg; data as of June 30, 2022.
4Source: Alicia H. Munnell of Center for Retirement Research at Boston College; data as of June 21, 2022.
5Source: Alight Solutions; data as of June 30, 2022.
6Source: David F. Babbel and Miguel A. Herce, “Stable Value Funds Performance” (February 2018).
7Source: Bloomberg; data as of July 13, 2022.
8Source: Bloomberg, data through June 30, 2022.
9Source: Bloomberg, data through June 30, 2022.
10Source: Edwin J. Elton, Martin J. Gruber, Andre de Souza and Christopher R. Blake, “Target Date Funds: What’s Under the Hood?” Center for Retirement Research at Boston College (January 2017).