Last week we saw a record breaking correction in the stock market with a 12% fall. Ouch. It’s like we stubbed our toe in the middle of the night. We didn’t see this coming and it hurts. Our response is to reach for the light. It would have made things a little easier if we could see, knowing which way to proceed.
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 haven’t done anything wrong. Yet, in reality, market corrections are healthy. They really help send us back towards the mean average. The timing of all this presents us with unique investment opportunities that allow us as investors to buy companies at a discount.
How should I invest if I cannot handle a market downturn?
The simple answer is, don’t panic when the market is volatile. This is the cost of entry when you invest in the stock market!
If this past week made you nervous, lost sleep or were just sick about it, then your portfolio probably has too much risk.
View this week’s bounce as a great opportunity to rebalance your allocation and thus reduce risk. This can also be a good time to take some of your profits, add short market hedges and raise some cash.
How Much Investment Risk Should You Be Taking When You Retire?
For starters, look at your risk appetite. As a retiree or an early retiree, you might consider 40% bonds and 60% stocks. Of course, these numbers are adjustable based on your individual plan.
How do you know it’s right for you? Back to your retirement plan. If you don’t have one, start now.
A word of advice: Your retirement and investment plan needs to change when the market changes. Stay away from amateur financial advisors who are set on a cookie cutter approach. Word buy and hold That’s not what you want to hear! There is a better way! But a retirement plan is a must.
Second, review your sequence-reward risk. What is that? Sequence-of-return risk refers to a fund’s withdrawal risk, particularly for retirees making withdrawals during a bear market.
This rate is the higher of the amount of return or loss. It’s the retirement withdrawal calculation + timing + market conditions to determine whether or not you’ll run out of money.
If you are retired in the distribution phase of life, your focus should be on your retirement income, not the rate of return. Therefore, as mentioned earlier, you may want to initiate a conversation with your advisor about your exposure to the market and your exposure to income investing.
Stocks are risky, bonds pay very little. Should I continue investing in stocks?
The short answer is yes. It is wise to have exposure to the stocks in your overall portfolio. Statistically people are living longer and having more opportunities for higher returns over time will help a lot in their retirement years.
For example, if you look at target date funds within retirement plans, they are responding by maintaining a high amount of stocks at least through the early part of the retirement years.
You can quantify your risk by taking a risk assessment, Doing this will allow you to get a good picture of 10%, 15%, and 20% market declines in your portfolio, which will help you determine what you’re comfortable with and how much of the stock you should keep. Needed
What’s up with the bonds?
Let’s talk about bonds. Currently, they offer low interest rates, however, the stock market reacts negatively when interest rates rise. So as we see the Federal Reserve begin to raise rates, they should do so but not so rapidly that it limits economic growth.
The 10-year Treasury bond rose to 2.9% last week. Currently, this rate seems to be our bang point Where the stock market does weird things. So, as the Fed hints at raising rates in 2018 to keep inflation under control, they may need to reconsider their plan to continue economic growth.
Should interest rates continue to rise and the Fed continue to reduce purchases of outstanding bonds, we could see an upward trend in bonds.
where the rubber meets the road
Even though the market has faltered in recent weeks, I advise you not to sell everything and cash in. rather; Use the current rally to reduce and rebalance portfolio risk, adjust those hedges as needed and add a little (not all) of the cash position.
Also be diligent and aware of market conditions (use 5 minute market update or real time updates), but always remember that the bull market will end. The prudent strategy is always to manage risk and ensure that your long-term retirement objectives remain stable.