7 Tips for Protecting Your Retirement Savings from Stock Market Turmoil
The saying: “what goes up, must come down,” is not always true of the stock market over the long term. But when stocks fall in the short term, it is particularly troubling for those of us who need money for retirement.
The financial crisis that started around 2008 severely impacted the retirement security of many people around retirement age. And what is happening now? Stocks in Asia plummeted. Stocks around the world — including in the United States — followed suit. Now they are bouncing up and down every day with big swings — which can often indicate that more volatility is in store.
And, in fact, the stock market point gains and losses in August of 2015 are approaching those experienced in the financial crisis of 2008 and the Great Depression in the 1930s.
Will your retirement portfolio be up or down tomorrow? What about the next day?
Knowing how to handle stock market turmoil is important for your peace of mind and for your financial health.
Here are seven tips for retirement planning and weathering financial turmoil:
1. Take a Deep Breath and Don’t Act Rashly: Watching the stock market close nearly 600 points down on August 24, 2015 was not fun. But those who remained calm and stayed the course were rewarded with a big bounce days later. We can not predict what will happen, but acting calmly is bound to serve you well.
Retail investors (regular people who invest their money themselves) very often get nervous and sell at the market bottom and then don’t re-invest and so miss the market recovery. This is the single biggest reason that retail investors typically lag overall market performance.
2. Be Informed: Financial markets are incredibly complicated. But you should have a reason for being invested in whatever way you are invested. Have a philosophy and stick to it. That way you can make investment decisions based on something and not just the way the wind is blowing.
3. Consider Lifecycle Investing: Lifecycle investing is an investment philosophy championed by Zvie Bodie, Robert Merton and other esteemed economists. One of their recommendations is that you invest money that you are sure to need for retirement in conservative investments and only take risks with money that would be nice to have.
4. Don’t Blindly Trust Investment Advice: Whether it is watching cable news, talking to your neighbor or even reading this article — be wary of all financial advice. There are exceptions to every rule and that is especially true of investment wisdom.
What is good for one investor, might not be a good idea for you.
5. Diversify: The old adage, “don’t keep all of your eggs in one basket,” is particularly true for retirement savings. You might want to hold stocks, but you would not want all of your money in stocks. Usually if one aspect of financial markets is down, something else is seeing gains. A financial advisor can help you diversify your money into a mix of investments that is likely to reduce your risks while still realizing gains.
A diversified investment portfolio for someone approaching retirement might have 30 percent in stocks (of a variety of types), 20 percent in annuities, 20 percent in bonds, 15 percent in precious metals and 15 percent invested internationally.
6. Rebalance at Regular Intervals: Rebalancing means that you buy and sell your investments in order to maintain your target diversification percentages. For example, if you were to lose a lot of money in stocks and earn money in precious metals, you would want to reallocate funds to return your overall portfolio to your prescribed diversification percentages.
7. Have a Retirement Plan and Keep it Updated: Your retirement plan should have a lot more to it than just savings and investments. Most people have other significant sources of wealth that could have a greater impact on our retirement security than savings.
For example, most of us have home equity, the ability to go back to work or delay our retirement date and — if we are lucky — we also have friends and relatives to help us smooth out our financial lives.
If you are experiencing losses in retirement investments, consider alternate sources of wealth before selling stocks that are down. Many people get a reverse mortgage as a source of money that can be used instead of stocks. Other people choose to go back to work — even if just part time — to help make ends meet.
The trick is to maintain a retirement plan and update it quarterly — making adjustments to all aspects of your plan based on all aspects of your life. A good retirement calculator can help you create and maintain this plan.