3 Steps Retirement Investors Must Take Now To Survive This Market


By Walter Updegrave, RealDealRetirement @RealDealRetire

Is the recent volatility a prelude to worse to come? Or just another scary bump in a near six-year bull market that still has legs? Neither I nor anyone else knows the answer. But I can tell you this: It would be foolish not to take the recent turmoil as an opportunity to re-evaluate your retirement investing strategy.

Stocks have given investors a wild ride lately: one-day swings in value up or down of 1% to 2% (or more) have become frighteningly common. And with both valuations and concerns about slowing global growth running high, we could easily be in for more of the same, if not worse. Or not.

And that’s the point. Since we just don’t know, the best you can do is take a step back, re-evaluate your investing goals and risk and make whatever changes, if any, you must to make sure you’d be comfortable with your portfolio whether the market nosedives from here, or recovers and moves to even higher ground.  What follows are three steps that will help you make that assessment.

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1. Assess your risk tolerance: If you’ve never completed a risk tolerance questionnaire to gauge your true appetite for risk, don’t put it off any longer. Do it now. If you don’t want to go through the process of completing a questionnaire, then at the very least tote up the value of your stock and bond holdings and estimate what size loss you might be facing if we see another downdraft like the 57% drop from October, 2007 to March, 2009. Should the market take a turn for the worse, you don’t to find that the mix of stocks vs. bonds in your portfolio is out of synch with the drop in the value of your portfolio that you can actually tolerate.

In fact, even if you have assessed your risk tolerance in the past, I recommend you do it again now. Why? Stocks have had a terrific run since it bottomed out during the financial crisis. Even after recent losses, the Standard & Poor’s 500 index was still up some 175% since March, 2009. It’s natural during such extended booms to become complacent. The fear and anxiety we felt during the last big market meltdown fades with time and we fall prey to overconfidence in two ways. First, we may begin to overestimate our real appetite for risk. Second, we begin to underestimate the actual risk we face in the market. Doing either of those alone isn’t good. The combination of both can wreak major havoc with your finances.

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2. Bring your portfolio in line with that risk assessment: Once you have a sense of what size loss you can handle without selling in a panic, you can then start making any adjustments, if necessary, to make sure your mix of stocks and bonds reflects the level of loss you can comfortably absorb. For example, if you feel that you would begin to freak out if you had to watch your portfolio decline any more than 20% but five-plus years of stock gains have bulked up the equity portion of your portfolio so that it represents 90% of your holdings while bonds have dwindled to just 10%, then Houston, you have a problem. A 90-10 mix in 2008 would have left you staring at a 33% loss. And that doesn’t count the decline that occurred at the end of 2007 and in the early mnths of 2009.

If you find that for whatever reason your portfolio is much more aggressive than you are,  you need to scale it back—that is, sell off some of your stock holdings and reinvest the proceeds in bonds and/or cash. This sort of adjustment is especially important if you’re nearing retirement or have already retired, as a severe setback can seriously disrupt your retirement plans.

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I’m sure you can come up with dozens of reasons to put off doing this. You’ll wait for the market to come back and then rebalance your portfolio. (News flash: The market doesn’t know—or care—that you’re waiting for it rebound.) Or you don’t want to sell because you’ll realize taxable gains. (Oh, you’ll feel better selling later for a smaller gain or even a loss. Besides, to the extent you can shift assets in 401(k)s, IRAs and other tax-advantaged retirement accounts, taxes aren’t an issue.)

Or maybe you’re one of those people who has a “feel” for the market, so you’ll wait until you sense the right vibe before making any adjustments. Fine. But at least check to see how well your ESP worked back in early 2000 when the dot-com era imploded and in late 2007 when stocks went into their prolonged tailspin. Unless your timing was spot on (and you’re willing to risk that you’ll be as lucky again), I suggest you revamp your portfolio so you’ll be able to live its performance in the event of a severe downturn.

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3. Take a Xanax: I’m speaking figuratively here. Once you’ve gauged your risk tolerance and assured that your portfolio’s composition is aligned with it, you’ve done pretty much all you can do from an investing standpoint. So try to relax. By all means you can follow the market’s progress (or lack of it). But try not to obsess about the market’s dips and dives (although much of the financial press will do its best to try to get you to do just that).

What you definitely do not want to do, is react emotionally to the latest news (be it good or bad) and undo the changes you made during your re-evaluation. That would be counterproductive and, far from following a well-thought-out strategy, you would be winging it. Which is never a good idea, and a particularly bad one during tumultuous markets. If watching market news on cable TV or reading about the financial markets online makes you so nervous that you feel the need to do something, then step…away…from…the…screen.

If all else fails, comfort yourself with these two thoughts: Market downturns are a natural part of the investing cycle—always have been, always will be. And investment moves driven by emotion and made in haste rarely work out for the best.   (10/16/14)

Walter Updegrave is the editor of RealDealRetirement.comIf you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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