Is Your Retirement Account Ready for the Next Market Correction?February 1, 2017
Market fluctuations are a normal and expected part of the economic cycle, but when it comes to your retirement, the timing of when the market drops can matter more than how much it drops. Market volatility is an even bigger cause for concern when your retirement plan is sitting stuck at multi-year highs. We’re experiencing the second longest bull market since 1929. In this past year, the Dow Jones has neared all-time highs. The market has been climbing for seven years and seven months, according to some measurements, and many people wonder how much higher the market can go before we enter a bear market.
In the last couple of decades, there have been several significant downturns that set many people back in their retirement plans. In fact, there have been sixteen down-bear markets in the last ninety years. Recession number seventeen will arrive, but it is impossible to predict when. What are some steps you can take to prepare your retirement plan for a correction?
Safeguard Your Investments
Do you want to live comfortably in retirement or just scrape by? Market volatility can determine what your lifestyle will be when you reach this milestone. Facing a decline the early years of retirement can be disastrous. Based on historical data, there is more than a 50% chance that you could experience a bear market in the first five years of your retirement. The following strategies won’t eliminate loss entirely, but they may provide a buffer against the natural ebbs and flows of the market.
One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances. But if you stay true to your investment strategy and avoid making decisions when emotions are running high, you won’t run the risk of losing even more. As long as you have created a disciplined financial plan and are rebalancing your portfolio regularly, you are setting yourself up for success. Your number one priority is to protect your principal, so don’t gamble with your investments when the market is struggling.
Maintain Proper Asset Allocation
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right types of holdings. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market correction.
Create an Emergency Fund
This strategy is all about being conservative. While cash investments may not provide a lot of growth, having a cash contingency fund with at least one year’s worth of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to invest even more into cash or cash equivalents, such as short-term bonds, certificates of deposits, or Treasury bills.
Work With Your Advisor
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your portfolio on track and work toward your retirement goals. Contact us to discuss the things you can do with your current retirement plan to increase profits and protect against loss, even when the market experiences a correction. Call us at 715-870-2450 or contact Point Wealth Management in Wausau, Wisconsin by clicking this link.
About Jeremy Reif, CRPS®
Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent fee-only financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy specializes in helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.