Stocks are falling again, here’s how to protect your portfolio

This is an updated version of the story that originally came out on July 21, 2022.

But then Federal Reserve Chairman Jerome Powell spoke at the annual economic symposium at Jackson Hole last week and pointed out emphatically that the US central bank was likely to raise rates more aggressively than investors expected. and he said American households can expect “some problems” ahead.

And some analysts say the stock could fall even further. “Be careful at this point as it’s not entirely clear if there will be a bottom in this cycle, let alone 2022. There will be more volatility in the next few months, so be careful,” said Chris Zaccarelli, chief investment officer. for the Alliance of Independent Advisers.

While the path ahead may be rocky, there are ways to mitigate the potential damage to your portfolio in the coming months.

Forget market time

Bear markets can take a toll on your psyche. There may be times when you are tempted to sell your equity investments and move the proceeds into cash or a money market fund.

You will tell yourself that you will return the money to the stock when the situation improves. But it will just fix your losses.

If you are a long-term investor that includes people in their 60s and 70s who may be in retirement for 20 years or more, don’t count on outmaneuvering current downward trends.

When it comes to investing success, “It’s not about getting to the market on time. It’s about time in the market,” said Taylor Wilson, Certified Financial Planner and Financial Planner. President of Greenstone Wealth Management in Forest City, Iowa.

Suppose you invested $10,000 in early 1981 in the S&P 500. By March 31, 2021, that money had grown to almost $1.1 million, according to Fidelity Management & Research. If you missed even five of the best trading days in those 40 years, it would rise to around $676,000. And if you sat out the best 30 days, your $10,000 would only go up to $177,000.

Rethink your contribution

If you can convince yourself not to sell at a loss, you might still be tempted to stop making regular contributions to a retirement plan for a while, thinking you’re just throwing good money after bad money.

How to take advantage of an interest rate hike

“This is a tough question for a lot of people because the reflex is to stop contributing until the market recovers,” Sefa Mavuli of Pavlov Financial Planning in Arlington, Va., told CFP.

“But the key to 401(k) success is consistent and consistent contributions. By continuing to contribute during market downturns, investors can buy assets at lower prices, which can help your account recover faster from a downturn.”

If you can rock it financially, Wilson even recommends increasing your dues if you haven’t reached the maximum yet. Beyond the value of buying more discounted items, he says, taking positive action can offset the anxiety that may come from seeing your savings (temporarily) diminish.

Reevaluate your distribution compared to your current plans

Life happens. Plans are changing. And so may your time horizon until retirement. So check if your current stock and bond allocation matches your risk tolerance and your ideal retirement date.

Do this even if you’re on target date fund, Wilson said. Due date funds are for people retiring in a specific year, such as 2035 or 2040. As this date approaches, the allocation of the fund will become increasingly conservative. But if you’re someone who’s been a late starter and who may have to take on more risk to reach your retirement goals, he noted, your current trust fund may not offer that.

If you really can’t stand it, increase your “comfort money”

Mark Struthers, CFP at Sona Wealth Advisors in Minneapolis, works with 401(k) members at organizations that hire his firm to provide financial wellness advice.

So he has heard from people across the spectrum expressing concern that they “can’t afford to lose” what they have. Even many educated investors wanted to leave during the downturn at the beginning of the pandemic, he said.

While Struthers will advise them not to panic and explain that downturns are the price investors pay for the big profits they make during bull markets, he knows that fear can get the better of people. “You can’t just say don’t sell because you will lose some people and they will get worse.”

So instead, he will try to get them to do things that can alleviate their short-term worries but cause the least long-term damage to their savings.

How much do I need for emergency savings?

For example, someone may be afraid to take enough risk in their 401(k) investments, especially in a falling market, because they are afraid of losing more and having fewer financial resources if they ever get fired.

So he reminds them of their existing assets for a rainy day, such as an emergency fund and disability insurance. It may then suggest that they continue to take on enough risk to provide the growth they need in their 401(k) for retirement, but redirect some of their new contributions into cash equivalents or low-risk investments. Or he may offer to redirect the money to a Roth IRA, as these contributions can be made available without taxes or penalties if needed. But it’s also keeping money in a retirement account just in case the person doesn’t need it in emergencies.

“Just knowing they have cash helps them not to panic,” Struthers said.

Paul LaMonica of CNN Business contributed to this report.

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