Last week we witnessed the stock market hit a record correction with a 12% drop. Oh. It’s like we stubbed our toes in the middle of the night. We didn’t see it coming and it hurts. Our reaction is to limp towards the light. If we could see, it would make things a little easier, knowing which way to move.
But where are we going? And how do we protect ourselves in the future?
It is important to note that although we feel bad, the markets have not done anything wrong. However, in fact, market corrections are healthy. In fact, they help to refer us towards the mean averages. The timing of all this gives us unique investment opportunities that allow us, as investors, to buy companies at a less expensive price.
How should I invest if I can’t handle the market downturn?
The direct answer, don’t be afraid when the market gets volatile. This is the entry price when you invest in the stock market!
If this last week made you nervous, you didn’t sleep or just fed you, you probably have too much risk in your portfolio.
View this week’s bounce as a great opportunity to rebalance your allocations, thereby reducing risk. It may also be a good time to take some of your profits, add short market hedges and raise some cash.
How much investment risk should you take in retirement?
For starters, look at your risk level. As a retiree or nearing retirement, you might consider 40% bonds and 60% stocks. Of course, these numbers are adjustable, depending on your individual plan.
How do you know if this is right for you? Go back to your retirement plan. If you don’t have one, start now.
One tip: Your retirement and investment plan will need to change when the market changes. Stay away from amateur financial advisors who set out on a cookie cutter approach. Words buy and hold are not what you want to hear! There is a better way! But a retirement plan is a must.
Second, review your sequence of returns risk. What’s that? A return sequence risk reviews a fund’s withdrawal risk, especially for retirees making withdrawals during a bear market.
It is more than a rate of return or the amount of a loss. This is a calculation of withdrawal withdrawal + time + market conditions to determine if you will run out of money or not.
If you are retired in the distribution phase of your life, your focus should be on your retirement income, NOT the rate of return. Therefore, as mentioned above, you may want to start a conversation with your advisor about your exposure to the market and your exposure to income investments.
Stocks are risky, bonds pay very little. Do I still invest in stocks?
The short answer is yes. It is advisable to have exposure to stocks in your general portfolio. Statistically, people are living longer, and over time, having more opportunities to earn high returns will help them greatly in their retirement years.
For example, if you look at target date funds within retirement plans, they are responding by holding large amounts of stock for at least the early part of their retirement years.
You can determine the amount of risk you are comfortable with by conducting a risk assessment. By doing so, you can get a good picture of what a 10%, 15% and 20% market decline will look like in your portfolio to help you determine what you’re comfortable with and how much you should hold in stocks.
What is happening with the Bonds?
Let’s talk about jumps. Currently, they offer low interest rates, however, when interest rates rise, the stock market tends to react negatively. So when we see the Federal Reserve start to raise rates, they should do so, but not so fast that it limits economic growth.
Last week the 10-year Treasury bond rose to 2.9%. Currently, this rate appears to be our bang point where the stock market does weird things. So, as the Fed has indicated it will raise rates to keep inflation in check in 2018, they may need to reconsider their plan to continue economic growth.
If interest rates continue to rise and the Fed continues to reduce its purchases of outstanding bonds, we could see an uptrend starting in bonds.
Where the rubber meets the road
Even though the market has stumbled in the last week, I advise you not to sell everything and put it in cash. Quite; use the current rally to reduce and rebalance portfolio risk, adjust those hedges as needed, and slightly (but not all) increase cash positions.
Also be diligent and stay on top of market conditions (use the 5 minute market update or live updates), but always remember that bull markets will come to an end. The prudent strategy is always risk management and making sure your long-term retirement goals remain stable.