BY JOSH LEONARD
Lately, clients seem to be more concerned than usual that a market correction is looming. And naturally those nearing retirement want to be sure their nest egg is protected.
Of course, no one can predict what the market will do next — and it’s a dangerous game to try — so it’s best to focus on what you can control, rather than what you can’t. Here are some tips to get you started:
1. Have an investment plan.
If you’re nearing retirement, you may have several investment accounts — a 401(k) or 403(b) at work, a brokerage account of your own and maybe a Roth IRA or some other assets. Your comprehensive plan will help coordinate it all based on your goals.
Often, we find prospective clients don’t even know what they have. They made investments years ago and tucked the paperwork in a drawer, or they set the asset allocation on their 401(k) when they opened the account and haven’t reviewed it since. Not knowing is not OK; it puts your savings at risk. Getting a written plan is one of the best ways you can secure your future.
2. Stress test your portfolio to make sure you know what risk you’re under.
Most people think of risk simply as the potential for loss as the market goes through a correction, but, depending on the type of investments you have, there are several other factors to consider: tax consequences, call risk on bonds, liquidity risk or currency risk if you’re investing outside of the U.S. A stress test can help identify the weak points in your portfolio and is a good starting point for your overall plan. Stress testing your portfolio is taking a look at your holdings through a full market cycle. A stress test will enable you to see how your portfolio would be impacted if went through another major market correction like 2008. One of the tools we use to stress test clients portfolios is Riskalyze.
3. Know your timeline for withdrawals.
You should have a strategy for when you’ll tap into your various retirement accounts. If you expect to access funds in the near-term, make sure they’re in more conservative investments or a money market account. That way, if there is a market correction or pullback, you won’t have to sell investments that have lost value for the short-term. You can risk, and continue to grow your money, in accounts that have a longer timeline.
4. Rebalance and reallocate.
If you had a 50%/50% stock-bond allocation in 1996 and just let it go for a decade, at the end of 2016, because the stocks appreciated, you would have had a 69%/31% mix. This would significantly increase the risk in your portfolio, especially with the market highs we’re experiencing now. Rebalancing is always important, but it’s a crucial part of retirement planning. Rebalancing your portfolio would take you back to your original allocation. This is often hard to do because it often means reducing positions in your winners and adding to your underperforming allocations.
As the economy changes and we go through different market cycles, you’ll also want to reallocate your assets to be sure you aren’t taking any unnecessary risk. Reallocating your assets is different than rebalancing in that we are changing the overall default allocation. One simple general allocation method is the Rule of 100. The Rule of 100 states that if you take 100 minus your age that is the amount of your portfolio that should be in bonds or more relatively safe assets. This would require you to adjust your allocation or reallocate annually.
5. Take the “free” money.
If your employer has a 401(k) match, make sure you’re at least contributing enough to maximize that benefit. Occasionally, I’ll meet with someone who says they’ve stopped making contributions to their plan because retirement is close and they don’t want to risk putting more money in the market. Depending on the details of your 401(k) plan, your match could be up to 100% of your contribution. I don’t know of any savings accounts that will give you 100% more when you make a deposit, so don’t pass up this opportunity. 401(k) plans have a stable value fund or a money market fund that you can allocate your existing principal or ongoing contributions to in order to get the benefit of the match while not taking additional risk.
6. Don’t try to time the market or chase returns.
Many investors think they can time the market by pulling out money when they perceive there’s more risk. This can drastically impact long-term returns.
According to a Morningstar study, if you were fully invested in the Ibbotson Large Company Stock Index from 1997 to 2016, your annual compounded rate of return would be 7.7%. But if you had the same investments and missed only the 10 best days during all those years, your return would be only 4%. And if you really weren’t good at all at market timing and missed the best 40 days, your return would be -2.4%.
Unless you have a crystal ball, timing the market is something you should stay away from. So is second-guessing your investment plan and chasing returns.
If you’re nearing retirement and you’re nervous about your investments, you don’t have to go it alone. A financial adviser can help you navigate more confidently through the ups and downs of the market and the many years ahead.