Last week we witnessed the stock market hitting a record breaking correction with a decline of 12%. Ouch. It’s like we stubbed a toe in the middle of the night. We didn’t see it coming and it hurts. Our reaction is to hobble toward the light. If we could see it would make things a little easier, knowing which way to move.
But where do we go? And how do we protect ourselves going forward?
It’s important to point out that while we feel bad, the markets have done nothing wrong. Yet, in fact, market corrections are healthy. They actually help to refer us back towards mean averages. The timing of all this gives us unique investment opportunities allowing us as investors to buy companies at a price that is less expensive.
How should I invest if I can’t handle the market downturn?
The straightforward answer, don’t be afraid when the market gets volatile. This is the price of admission when you invest in the stock market!
If this last week made you nervous, you lost sleep or just simply were sick about it, you probably have too much risk in your portfolio.
Consider this week’s bounce as a great opportunity to re-balance your allocations thus reducing risk. It also may be a great time to take some of your profits, add short market hedges and raise some cash.
How much investment risk should you take on when you are retired?
For starters, look at your level of risk. As a retiree or soon-to-be-retired, you might consider 40% bonds and 60% stock. Of course these numbers are adjustable, based on your individual plan.
How do you know if this is right for you? Revert back to your retirement plan. If you don’t have one, start now.
A word of advice: your retirement and investment plan will need to change when the market changes. Stay away from amateur financial advisor’s who are set on a cookie cutter approach. The words buy and hold are not what you want to hear! There is a better way! But a retirement plan is a must.
Secondly, review your sequence-of-returns risk. What’s that? A sequence-of-returns risk reviews a fund’s withdrawal risk, especially for retirees making withdrawals during a bear market.
It’s more than a rate-of-return or the amount of a loss. This is a calculation of retirement withdrawal + timing + market conditions to determine whether or not you will run out of money.
If you are a retiree in the distribution phase of life your focus needs to be on your retirement income, NOT the rate of return. Therefore, as previously mentioned, you might want to start a conversation with your advisor about a your exposure to the market and exposure to income investments.
Stocks are risky, bonds pay too little. Do I continue to invest in stocks?
The short answer is yes. It is wise to have exposure to stocks in your overall portfolio. Statistically people are living longer and over time having more opportunity for high returns will greatly assist them into their retirement years.
For example, if you look at Target dated funds within retirement plans, they are responding by maintaining elevated amounts of stocks through at least the early part of retirement years.
You can determine the amount of risk your comfortable with by taking a risk assessment. In doing so you can obtain a good picture of what a market downturn of 10%, 15%, and 20% will look like in your portfolio to help you determine what what you’re comfortable with and how much you should keep in stocks.
What is happening with Bonds?
Let’s talk about bonds. Currently, they offer low interest rates, however, when interest rates increase the stock market tends to react negatively. So as we see the Federal Reserve begin to increase rates, they must do so but not so fast that it limits economic growth.
This past week the 10-year treasury bond increased to 2.9%. Currently, this rate seems to be our BANG point where the stock market does funny things. So, as the Fed has indicated raising rates to keep inflation in check in 2018, they may need to reconsider their plan to continue economic growth.
Should interest rates continue to rise and the Fed continue to scale back it’s buying of outstanding bonds, we could see an upward trend starting in bonds.
Where the Rubber Meets the Road
Even though the market has stumbled in the recent week I advise that you to not sell everything and put into cash. Rather; use the current rally to reduce and re-balance portfolio risk, adjust those hedges as necessary and slightly raise (not everything) to cash positions.
Also remain diligent and aware of market conditions (use the 5 Minute Market Update or real time 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 objectives hold steady.