By: Colleen Weber
Economic Outlook / News and Updates
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By Colleen Weber, CFP®, CPA
Regardless of whether you are an avid reader of Market Watch or just tune in to the nightly news every now and then, you know that 2017 was a banner year for stocks. In fact, both the Dow Jones and the S&P 500 celebrated the launch of 2018 by reaching record highs1 and until the beginning of February 2018, we were experiencing the second-longest bull market since 1929.
But market fluctuations are a normal and expected part of the economic cycle. What goes up must come down. A recent 10% and 3.75% drop for the Dow Jones and S&P 500, respectively, is a testament to that fact that markets ebb and flow.2 It’s been less than a decade since the financial crisis hit, and the devastating losses are still fresh in many investors’ minds. It’s not surprising that many of us, particularly those nearing retirement, are worried about the impact a market downturn may have on their retirement plan. It’s easy to get excited and comfortable while the markets are soaring and returns are rolling in, but what goes up must come down.
Adhere to Proven Principles
If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your retirement plan can handle market volatility. Here are a few ways you can accomplish this:
Have a Long-Term Perspective
The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.
Check Your Emotions
One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Maintain Proper Asset Allocation
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right types of holdings. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it still reflects your appropriate level of risk and that you haven’t become too reliant on any one asset category.
Create an Emergency Fund
This strategy is all about being conservative. While cash investments may not provide a lot of growth, having a cash contingency fund with at least one year’s worth of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to invest even more into cash or cash equivalents, such as short-term bonds, certificates of deposits, or Treasury bills.
Know the Facts
Knowledge is essential for making informed decisions. The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it. Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals.
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your retirement plan on track and work toward your financial goals. Have questions or need help? Book a free introductory meeting online to discuss the steps you can take with your current retirement plan to increase profits and protect against loss, even when the market experiences a downturn.
Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes, and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.