If you’ve kept an eye on the markets in the past year, you know that 2017 was a banner year for stocks. In fact, both the Dow Jones and the S&P 500 celebrated the launch of 2018 by reaching record highs (1) and until the beginning of February 2018, we were experiencing the second longest bull market since 1929.
But market fluctuations are a normal and expected part of the economic cycle. What goes up must come down. A recent 10% and 3.75% drop for the Dow Jones and S&P 500, respectively, is a testament to that fact that markets ebb and flow. (2) 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. In light of the recent market loss, you may be wondering what steps you can take to prepare your retirement plan for a downturn. Here are some solid financial principles that will help you keep your money and your emotions in check when the market takes a turn for the worse.
Market volatility can mean the difference between living comfortably in retirement or just scraping by. Facing a decline in 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 account balance. 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 that accounts for the inevitable downturns of the market, you are doing your part to prepare.
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 holdings that match your stage of life. This is the time to reduce risk, especially on dollars that will be needed in the short term.
In my office, we set aside any dollars that are needed for income in the next 3, 5, or 10 years. These accounts are in lower-risk investments. Then, we identify the monies that aren’t needed until the long term. You can withstand greater risk on this portion of your assets. In this way, you can minimize the impact of a market downturn—because it won’t have a life-changing impact on the dollars you will need in the next few years.
Every grown-up knows you need an emergency fund! Don’t skip this critical strategy. While cash investments may not provide a lot of growth, having a cash contingency fund will provide another layer of protection. And that increased protection adds greater peace of mind during times of uncertainty.
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 how to build down markets into your plan, you can keep your retirement lifestyle on track. Have questions or need help? Call us at (410) 863-1040 to discuss the steps you can take with your current retirement plan to increase profits and protect against loss, even when the market experiences a downturn.
Securities offered through TCM Securities, Inc., Member FINRA/SIPC. Prostatis Group LLC is a registered investment adviser.
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