Although US markets recovered some of last week’s losses on Monday on hopes that a resolution with Iran – and the resumption of oil exports through the crucial Strait of Hormuz – could happen sooner rather than later, investors are still confused, as the oil shock adds to concerns about a weak labor market and stubborn inflation.
For people nearing the end of their careers, market volatility can be very stressful. While stock gyrations can give workers of all ages heartburn, people closing in on a time when they’ll be taking money out of their 401(k) instead of putting money into it have more reason to worry.
If you’re planning to retire within the next three to five years, investment experts say there’s one important step you should take right now to keep your retirement financial goals on track.
Make sure you are appropriately diverse
Achieving diversification isn’t a silver bullet against market losses, but it can go a long way toward mitigating those losses and providing peace of mind.
“Staying diversified is one of your biggest shields” in a bearish market, says Emily Safford, a wealth advisor at Girard, Univest Wealth Division, because gains in one asset class or category can help offset losses in another.
To generate consistent growth over the long term, you want exposure to different types of assets, as each offers different benefits – and can present different risks. That’s why experts say it’s important to keep a portfolio balance appropriate to how long you plan to stay in the job and your appetite for risk.
In practice, this means investing in US and foreign stocks and high-quality corporate or government bonds. Mutual funds or exchange-traded funds (ETFs) carry less concentration risk than investing in individual companies, so they are a good choice for many investors.
Safford adds, however, that market volatility serves as a good reminder for pre-retirees to review their asset allocation. More than 100 benefits of “Magnificent Seven” and the technology sector at large can create distortions that don’t balance your portfolio and expose you to more risk than you’d like.
“You want to make sure you balance those positions properly so they don’t take away from your portfolio,” he said.
The closer you get to retirement, the more you should shift from a stock-heavy allocation to a mix that includes more bonds as your retirement date approaches. Many retirement investment options do this automatically with target date funds that rebalance on a regular schedule. You will also want to build your savings, as this will allow you to withdraw your savings for living expenses in retirement without forcing you to sell assets at a loss.
Be careful – but not too careful
At the same time, it’s important not to play it too safe, says Ross Mayfield, investment strategist at Baird.
“It’s a delicate balance, but you don’t want to stray too far from stocks and growth assets,” he adds, because you need your retirement nest egg to last for decades to come.
Even with CDs and high-yield savings accounts yielding returns of around 4%, people who view sitting on the sidelines as safer than sitting in the market are missing one big point, Safford warns.
“If you really look at it and take out inflation, you’re probably not getting anything, so it’s not a good long-term strategy,” he said.
Although diversification means having both stocks and a variety of bonds in your portfolio, it’s wise to keep your risk concentrated in stocks, according to Lorne Abramson, founder of Abramson Financial Planning.
Historically, bonds have tended to perform inversely to stocks, making them good hedges because they rise when stocks slide. But this negative correlation is not as strong in today’s market, meaning that your so-called “safe” money may be more vulnerable than you intended.
“Take risks in stocks,” Abramson said. “Why take that risk on the other side of the ledger, especially with money you think you’re going to spend?”
Abramson advises sticking to safe instruments like Treasuries versus risky corporate bonds or bond funds that may bring high yields but may sustain large losses. When it comes to your bond allocation, “maintenance of infrastructure is a big risk that you should be managing,” he says.
And above all? Don’t panic, no matter how scary the headlines are. This locks in losses, while remaining invested gives you the chance to get it back later.
“The key thing in times of uncertainty is that you don’t want to do anything rash,” advises Mayfield.
Over a 20-year period, seven of the 10 best market days occurred within 15 days of one of the 10 worst days. The analysis found that investors who stayed in the market during that period earned nearly twice as much return as those who missed those 10 prime days.
“If you already have a market problem, you probably want to get it out,” Mayfield said. Remember, he adds, “You only lose paper until you sell.”
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