Last week we witnessed the stock market hit a record correction with a 12% drop. Oh. It’s like we’ve stubbed our toes in the middle of the night. We didn’t see it coming and it hurts. Our reaction is to limp into the light. If we could see it, things would be a little easier, knowing which direction to move.
But where do we go? And how do we protect ourselves in the future?
It is important to note that while we feel bad, the markets have done nothing wrong. However, in fact, the market corrections are healthy. In fact, they help bring us back to the average averages. The opportunity 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 simple answer is don’t be afraid when the market turns volatile. This is the entry price when you invest in the stock market!
If this past week made you nervous, lost sleep, or just got sick, you probably have too much risk in your portfolio.
See this week’s rebound as a great opportunity to rebalance your allocations and reduce risk. It can also 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 When You Retire?
To start, look at your level of risk. As a retiree or soon to retire, you might consider 40% bonuses 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, get started now.
Tip: Your retirement and investment plan should change when the market changes. Stay away from hobbyist financial advisers who have set their sights on a cookie cutter approach. Words buy and hold they are not what you want to hear! There is a better way! But a retirement plan is a must.
Second, review your return sequence risk. What’s that? A return sequence risk reviews a fund’s withdrawal risk, especially for withdrawals that make withdrawals during a bear market.
It is more than a rate of return or the amount of a loss. This is a calculation of retirement retirement + time + market conditions to determine if you will run out of money or not.
If you are a retiree in the distribution phase of 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 market exposure and investment income exposure.
Stocks are risky, bonds pay very little. Do I keep investing in stocks?
The short answer is yes. It is advisable to have exposure to stocks in your general portfolio. Statistically, people live longer and, over time, having more opportunities for high returns will help them tremendously in their retirement years.
For example, if you look at target date funds within retirement plans, they are responding by holding large amounts of shares for at least the first part of their retirement years.
You can determine the amount of risk you are comfortable with by taking a risk assessment. By doing so, you can get a good picture of what a 10%, 15%, and 20% market drop will look like on your portfolio to help you determine what you are comfortable with and how much you should hold in stocks.
What is happening with the 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 when we see the Federal Reserve start to raise rates, they should do so, but not so fast as to limit economic growth.
Last week, the 10-year treasury bond rose to 2.9%. Currently, this rate appears to be ours BANG point where the stock market does fun things. So as the Fed has indicated a rate hike to keep inflation under control 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 purchase 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 last week, I advise you not to sell everything and put in cash. Pretty; use the current rally to reduce and rebalance portfolio risk, adjust those hedges as needed, and slightly (not all) increase cash positions.
Also stay 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 to manage risk and make sure your long-term retirement goals remain stable.