Protect your assets in this volatile market
After a long stretch of calm and a relentless rally, the stock market recently took a breather. No one should be surprised — unless you’re surprised it took so long for this bull market to take some downtime.
Stock market corrections, typically defined as a loss between 10 percent and 20 percent from the peak, occur about every two years, on average. The last one began in May 2015, so we were due, especially considering that the Standard & Poor’s 500 index trades at about 18 times estimated corporate earnings for the coming 12 months — above the five-year average of 16 times and the 10-year average of 14.
Get used to a rockier market, said Jim Stack, president of InvesTech Research and Stack Financial Management “The road ahead will be more volatile with increasing risk,” he said.
When a market is ready to correct, it will seize on a trigger — and this market has plenty to choose from. Worries include some warning signs of inflation, with wages ticking higher. Bond yields are rising, making stocks look even more expensive in comparison and raising fears that higher rates could eventually crimp economic growth.
All eyes are on a new Federal Reserve chief as the central bank navigates a tighter monetary policy in 2018. And then there’s the partisan divide in Washington, with intermittent threats of a government shutdown, not to mention escalating nuclear tensions with North Korea.
Whatever the cause, any market drop is particularly worrisome for retirees and near-retirees, who have less time to make up for losses. Here are seven tips to help you survive any turmoil.
One of the important lessons from the devastating 2007-09 downturn is that, even in the worst of times, “recoveries happen within a reasonable period,” said financial planner Cicily Maton, of the Planning Center, in Chicago.
Since 1945, it has taken an average of just four months to recover from market declines of 10 to 20 percent. Bear markets (resulting in losses of 20 percent or more) have taken an average of 25 months to break even.
Fight the urge to cut and run, and avoid selling your depreciated stocks, if you can. If you are in your 70s, remember that you have until Dec. 31 to take required minimum distributions from your retirement accounts.
Keep your portfolio on track
Even retirees should have an investment horizon long enough to weather this storm or whatever the market can dish out.
For a retirement that can last decades, T. Rowe Price recommends that new retirees keep 40 to 60 percent of their assets in stocks. And because stocks stand up to inflation better than bonds and cash over time, even 90-year-olds should keep at least 20 percent of their assets in stocks.
If you’ve been regularly monitoring your portfolio, you’ve already been cutting back on stocks periodically over the past few years. Now is a particularly good time to revisit your investment mix to ensure that it is consistent with your tolerance for risk.
During the bull market, “people were getting comfortable with those returns, and may have let their stock allocation drift higher,” said Maria Bruno, a senior investment strategist at Vanguard. “We’ve been reminding them to rebalance.”
Make sure you’re diversified
When stock prices are being pummeled, bonds are often pushed higher by investors seeking a safe place to hide. That’s been a bit tricky recently, with bond prices falling as yields rise (yields and prices move in opposite directions).
Nonetheless, a diversified portfolio is your best defense against the ups and downs of any single assets class or industry sector. In general, investors should own a mix of domestic and foreign bonds and U.S. and overseas stocks.
And within the stock allocation, you should have a variety of market sectors. No single sector should claim more than 5 to 10 percent of your holdings, said T. Rowe Price senior financial planner Judith Ward.
Stick with high-quality holdings
This is no time to speculate. Look for companies with dependable earnings, impeccable balance sheets and healthy dividends — or funds that invest in such companies.
T. Rowe Price Dividend Growth (PRDGX) is one of Kiplinger’s favorite no-load mutual funds. It delivers steady returns with below-average volatility by focusing on sturdy companies that dominate their businesses and pay out reliable and rising dividends. PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV) is a good choice for exchange-traded fund investors.
Tap your cash bucket
Instead of dumping stocks, use Social Security and any annuities, plus the portion of your portfolio that comprises cash and short-term CDs, to meet your expenses.
Some financial advisers recommend creating three “buckets” of investments: One with cash and short-term CDs; the second with short- and intermediate-term bonds; and the third with stock and bond funds. Relying on the first bucket will leave the stocks-and-bonds bucket of your portfolio intact.
Rethink your withdrawal strategy
Don’t rely blindly on a rule of thumb that bases its assumptions on historical returns rather than current conditions. For instance, the 4 percent rule — a withdrawal strategy based on back-testing 30-year periods starting in 1926 — said you can safely take 4 percent of your total portfolio in the first year of retirement and in subsequent years, adjusted for inflation.
Now, with stocks down and 10-year Treasury bonds yielding 2.8 percent or more, you might be wise to scale back distributions to, say, 3 percent or less of total assets (plus an inflation adjustment), or to take 4 percent and skip the inflation adjustment.
Such measures are especially important if you’re at the beginning of your retirement. An unrealistic first-year withdrawal during a bear market could cripple your portfolio’s potential for long-term growth.
If you don’t have other income to offset lower withdrawals, consider deferring gifts, trips and other discretionary expenditures until the market stabilizes.
Also keep in mind that your spending changes — and typically declines somewhat — in retirement. You may find that cutting back is more doable than you think, said Blanchett.
Sound drastic? Maybe so, but “delaying retirement does an amazing amount for improving retirement success,” said Blanchett of Morningstar Investment Management.
Not only do you have more time to save, including making catch-up contributions to your retirement accounts, but you’re also letting the money in your accounts grow, and you have fewer years during which you must rely on savings once you do retire. “Working longer really reduces the stress on your portfolio,” he said.
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