With stocks falling again, here’s how to protect your portfolio

This is an updated version of a story that was originally published on July 21, 2022.

But then Federal Reserve Chairman Jerome Powell spoke at the annual Jackson Hole Economic Symposium last week, signaling strongly that the US central bank would likely raise rates more aggressively than expected. the investors. and said that American households can expect “some pain” in the future.

And some analysts say the stock may have to fall further. “Be careful at this point, as it’s not entirely clear if the bottom has been reached for this cycle, let alone 2022. There will be more volatility in the coming months, so caveat emptor,” said Chris Zaccarelli, chief investment officer. . for the Alliance of Independent Advisors.

While it can be a bumpy road, there are ways to mitigate the potential damage to your portfolio in the coming months.

Forget timing the market

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

You’ll tell yourself that you’ll move the money back into stocks when things get better. But doing so will only block your losses.

Retreating into a bear market: what to do, what to avoid

If you’re a long-term investor, which includes those in their 60s and 70s who may be retired for 20 years or more, don’t expect to outsmart the current downtrends.

When it comes to investing success, “It’s not about timing the market. It’s about being in the market,” said Taylor Wilson, a certified financial planner and President of Greenstone Wealth Management in Forest City, Iowa.

Let’s say you invested $10,000 in early 1981 in the S&P 500. That money would have grown to nearly $1.1 million by March 31, 2021, according to Fidelity Management & Research. If he had missed just the top five trading days over those 40 years, it would only have grown to about $676,000. And if you had stayed out the best 30 days, your $10,000 would only have increased to $177,000.

Rethink your contributions

If you can talk yourself out of selling at a loss, you may still be tempted to stop making your regular contributions to your retirement savings plan for a while, thinking you’re just throwing good money after bad.

How to take advantage of rising interest rates

“This is a difficult question for many people, because the knee-jerk reaction is to stop contributing until the market recovers,” said CFP Sefa Mawuli of Pavlov Financial Planning in Arlington, Virginia.

“But the key to 401(k) success is consistent, ongoing contributions. Continuing to contribute during down markets allows investors to purchase assets at cheaper prices, which can help your account recover faster afterward.” of a market downturn.

If you can balance it financially, Wilson even recommends increasing your contributions if you haven’t maxed out yet. Besides the value of buying more at a discount, he said, taking a positive action step can offset the anxiety that can come from seeing your savings (temporarily) dwindle.

Re-evaluate your allowance against your current plans

Life happens. Plans change. And so can your time horizon until retirement. So check that your current allocation to stocks and bonds matches your risk tolerance and ideal retirement date.

Do this even if you’re in a target date fund, Wilson said. Target date funds are geared toward people who will retire around a certain year, for example, 2035 or 2040. The fund’s allocation will become more conservative as the target date approaches. But if you’re someone who started saving late and may need to take more risk to reach your retirement goals, she noted, your current target date fund may not offer that.

If you really can’t stand it, increase your ‘comfort cash’

Mark Struthers, CFP of Sona Wealth Advisors in Minneapolis, works with 401(k) participants in organizations that contract with his company to provide financial wellness advice.

So you’ve heard from people across the spectrum expressing concern that they “can’t afford to lose” what they have. Even many educated investors wanted out during the recession early in the pandemic, she said.

While Struthers will advise against panicking and explain that recessions are the price investors pay for the big returns they earn during bull markets, he knows that fear can get the best of people. “You can’t just say ‘don’t sell’ because you’ll lose some people and they’ll be worse off.”

So instead, you’ll try to get them to do those things that may ease your short-term worries, but do the least long-term damage to your savings.

How much do I need for emergency savings?

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

So remind them of your existing assets for hard times, like your emergency fund and disability insurance. Then you can suggest that they continue to take enough risk to build the growth they need in their 401(k) for retirement, but redirect a portion of their new contributions to a low-risk or cash-equivalent investment. Or you can suggest they redirect the money to a Roth IRA, since those contributions can be accessed tax-free and penalty-free if needed. But it’s also keeping the money in a retirement account in case the person doesn’t need it for emergencies.

“Just knowing they have that consolation cash in there helps them not panic,” Struthers said.

Paul LaMonica of CNN Business contributed to this report

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