Reassess The Old 60/40 Adage
In the past, most advisors would suggest an allocation of 60 percent equities and 40 percent bonds to balance out an investment portfolio. Times have changed, especially in the post-pandemic economy, and the old benchmark might need rethinking, say some experts.
The current market is different from previous periods of volatility because it is affecting stocks and bonds, says Walsh. In the past, bonds could serve as a safe haven during periods of stock market volatility, but not this time. Bonds are holding up better than stocks, but a 60/40 portfolio is on track for one of its worst years ever. When combined with multi-decade high inflation, this is especially troubling for those in or near retirement.
This year has seen a historic rise in interest rates to combat high inflation.
As a result, high-quality fixed income isnt providing investors with the downside protection theyre used to, as bonds are down nearly as much as stocks in 2022, adds Presogna.
With bonds not being the mainstay they once were, investors will need to get creative to invest defensively if they suspect a further crash is on the way.
Again, for investors with long time horizons, experts seem to agree that its likely best to stay put and ride the wave out while making sure youre always diversified.
How To Protect A 401 And Ira Before A Stock Market Crash
The saying goes, Dont Put All Your Eggs in One Basket, which means not investing your retirement into just one type of investment. However, I believe the following advice Im providing applies as well.
The goal to steadily grow a 401k or IRA is to diversify, and diversification can vary based on current age, retirement savings goals, risk tolerance, and a target retirement age. Diversifying in both aggressive and conservative investments will allow for a balance.
Tip #: Keep Contributing During Downturns
Another important thing you can do to mitigate market losses is to continue contributing on a monthly basis into your 401 plan even as the market is going down. This allows you to buy stocks at a cheaper price to compensate for some of the stocks that you may have bought at a higher price.
This is a form of dollar cost averaging, which most of the time will help you get an average price on your shares that will be lower, compared to someone who gets rattled and discontinues buying shares every time the market goes down.
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What Is The Safest 401k Investment
Bond Funds Federal bonds are regarded as the safest investments in the market, while municipal bonds and corporate debt offer varying degrees of risk. Low-yield bonds expose you to inflation risk, which is the danger that inflation will cause prices to rise at a rate that out-paces the returns on your investments.
Try To Contribute Enough To Earn The Full Employer Match
One of the keys to building a robust retirement fund is to save as consistently as possible even during market downturns. Market crashes are actually fantastic opportunities to invest more, because you can get more bang for your buck when stock prices are lower.
Matching 401 contributions from your employer can help your money go further, so it’s wise to take full advantage of them. After all, those matching contributions are essentially free money, and if you’re not saving at least enough to earn the full match, you’re leaving money on the table.
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Diversifying Your Assets To Secure Your Retirement
Protecting your retirement income through diversification means dividing your retirement funds into different pots and holding each pot in a different type of asset.
Im sure we have all heard the adage “don’t hold all your eggs in one basket”. This is a timeless adage, thought initially to be quoted by Miguel de Cervantes Saavedra, a Spanish novelist, in his 1605 novel, Don Quixote. His version is: “It is the part of a wise man to keep himself today for tomorrow, and not to venture all his eggs in one basket”. It has been requoted and reattributed many times over the last four hundred plus years, and, when you consider the eggs metaphor, its fitting that we often call our retirement money a nest egg.
How Does The Stock Market Work And How Can It Affect Your 401
The stock market is a public resource that everyone can use to invest in companies. When you buy a companyâs shares, youre purchasing a certain percentage of their business. So if they do well, your money will grow along with them, but if they do poorly, then youll lose part of your investment.
In laymans terms, the stock market is the result of many buyers and sellers worldwide who trade stocks daily. These stocks can be from big, multinational, publicly-traded corporations like Apple, Tesla, and Meta , and smaller companies and startups from many different sectors of the economy.
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Do Not Withdraw Early When The Market Crashes
One mistake many people make is that as soon as an adverse economic event occurs and prices plummet, people, out of fear, start withdrawing their money from the 401 even if they are not of the retirement age by then. This is not very advantageous, as when you withdraw before the retirement age of 59 and a half, you will be subject to penalties, and you will have to pay extra dollars.
Hence, giving in to the feelings of panic and terror can backfire on you. You will be subject to IRS tax penalties for withdrawing early.
Rather, you should brave through the storm of low prices and market uncertainty and be rewarded once the market is on its road to recovery in the future.
What Causes Bear Markets
There is no one cause for bear markets, which is why trying to predict them tends to be futile. Here are the general culprits that tend to unleash the bear.
- Rising interest rates. Lenders, whether they are giving you a home mortgage or financing a mega-million-dollar bond offering, like to get their money back. They also want a rate of return thats higher than inflation. If they think inflation will rise, lenders start raising their interest rates. After all, if you earn 3 percent on an investment and inflation averages 4 percent, youve lost a percentage point.
Why is that bad for stocks? Bonds are loans to corporations, municipalities and the U.S. government. If investors can get a relatively good rate on a bond, they will tend to move money out of stocks and into interest-bearing investments, such as government bonds. In addition, higher rates mean that businesses have to pay more for loans, which reduces corporate earnings.
- Sobriety. The stock market is a place for optimists: You buy stocks because you think corporate profits will increase, the economy will be healthy and prices will rise. Every so often, however, stock investors get too optimistic, making big bets on stocks that dont deserve all that money. In 2000, for example, investors made huge bets on online companies such as the now-defunct Pets.com. Eventually, investors wised up and realized that those companies were never going to make money, and that started the big bear market of 2000.
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Tip #: Know Your Risk Factor
One of the best remedies to make sure you dont panic and pull your money out of the market after a big drop is to assess your risk tolerance, preferably before you start investing in your 401 plan. There are a number of risk-assessment tools, such as Riskalyze, that can help you do this.
For example, if the risk assessment shows you cannot tolerate more than a 10% drop in your portfolio, you can invest more heavily in bonds and cash equivalents and less in stock. If it still turns out your portfolio has fallen more than you can stomach, the best thing to do before you bail out, is to pause and think about it. Perhaps even talk to a friend with more experience investing in stock.
If you do pull out near the bottom, you may miss the market recovery if history repeats itself and the market rebounds, which so far it always has.
Maintain The Right Portfolio Mix
The single most important thing you can do to mitigate risk is to diversify your portfolio. Some investors believe having their savings in a mutual fund means they’re in good shape. Unfortunately, it’s not quite that simple.
There are two key types of diversification that every investor should employ. The first is asset allocation. That’s the amount of each asset class you own, whether it be stocks, bonds, or cash equivalents, such as money market funds.
As a general rule, you want to lessen your exposure to riskier holdings as you get closer to retirement. These securities tend to be more volatile than high-grade bonds or money market funds, so they can put investors in a bigger hole when the economy goes south. Older adults, unlike younger workers, simply don’t have enough time to wait for a recovery when stocks take a hit.
That’s why it’s important to work with a financial advisor and determine the asset allocation that best fits your age and investment objectives. Because asset categories will grow or decline at different rates over time, it’s a good idea to periodically rebalance your account to keep the allocation consistent.
Say you own a portfolio with 55% of the holdings in stock and 45% in bonds. Suppose that stocks had a great year and, because of these gains, they now comprise 60% of your account. Rebalancing means selling some of the stocks and buying enough bonds to maintain your overall risk profile.
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What Goes Up When The Stock Market Crashes
There are a few things that go up when the market crashes. One is the price of haven assets, such as gold and silver. Another is the price of bonds, which tend to be less volatile than stocks. Finally, the price of put options usually increases since investors are looking for ways to hedge their portfolios.
What Kind Of Assets Should You Consider When Looking To Diversify Your Retirement Nest Egg And/or 401k Plan
There are many options that you could consider to help diversify your 401k retirement fundsor more generally diversify the way you hold funds for your retirement.
Here is a list of just some of the options:
- Fixed index annuities
We would suggest that before you decide which assets you want to diversify your retirement funds into, you look at the risk levels of each category and the risks associated with each option. For example, it will be riskier to buy stocks in the AIM market than in the Dow Jones market. Even beyond this, specific stock in each of these markets will be more or less risky.
You need to figure out the level of risk youre prepared to accept, and there are many tools on the market that will help you do this. Heres one we have used before:
This tool will tell you the type of risk profile you have, based on you answering a few simple questions. Unless youre in the aggressive or highly aggressive category, we suggest looking at a range of diversification options.
The more risk-averse you are, the more diversified your retirement holding should be because the wider you spread your retirement money, the less likely you are to lose a significant portion of your savings due to any of the situations we have previously highlighted.
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Below Is A List Of Just A Few Of The Things That Could Cause A Stock Market Crash:
- Rampant speculation
- Natural or man-made disasters
- Economic crisis
When considering if you should diversify your retirement savings and how much of it you should diversify, refer to the above list and decide how likely you think any of these events are to occur.
When considering if you should diversify your retirement savings and how much of it you should diversify, refer to the above list and decide how likely you think any of these events are to occur.
Suppose we were to look at the stock market crash of 1929. In that case, the crash is primarily attributed to the rampant expansion of the stock market during the 1920s known as the roaring twenties, followed by a period of wild speculation, which peaked around August 1929. Production started to decrease, and unemployment increased, ultimately leading to the great depression. On October 28th and 29th the stock market lost around 85% of its value.
How Do I Protect My 401 During A Market Crash
The best way to protect yourself and your retirement savings in the event of a crash will depend on a few factors, including how much risk youre willing to take and how long you have until you plan to retire. But no matter what your situation is, the very first thing you should do is not panic. The market goes up and down that is its nature.
Next, consider your specific situation and your best response. Here are some steps to take.
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There Are Ways To Keep Your Money Safe No Matter What The Market Does
The stock market has taken a tumble recently, officially entering correction territory earlier this month.
While many investors might be concerned that this downturn could turn into a full-blown crash, nobody can say for certain whether or not that will happen. But that doesn’t mean you can’t prepare just in case.
Image source: Getty Images.
What Goes Up Must Come Down And After Years Of A Steadily Improving Stock Market It’s Only A Matter Of Time Before The Tides Turn And The Market Falls Once Again Here’s How To Protect Yourself When The Market Inevitably Takes A Turn For The Worse
Since the market hit rock bottom about eight years ago, it has been steadily improving, and investors have seen skyrocketing stock prices and annual returns. Unfortunately, those spectacular averages won’t last forever, and the investment pros have some pretty pessimistic predictions for the future.
Asset management company BlackRock, for example, claimed in its quarterly investment outlook report that U.S. stocks are expected to gain an annualized 5.9% over the next 10 years .
Image source: Getty Images.
It’s perfectly normal for the stock market to bounce around like a roller coaster. But here’s the problem: According to a survey by BlackRock, 66% of investors believe future gains will be roughly equivalent to what they’ve seen in recent years, and 17% believe they’ll be even higher.
On top of that, many investors are holding a few flawed assumptions about how much they’ll actually need to retire. While 56% of investors believe they’ll have enough money to retire, 65% said they were unaware that expected returns are predicted to be far lower in the future than they’ve been in the past.
So what can you do to protect your retirement savings in the event that the market crashes?
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Be Proactive About Your Long
Long-term investors understand that even though they’re going to experience significant stock market volatility, they’ll miss out over time and not meet their goals if they sell when the market takes a dive.
As a long-term retirement saver, the worst thing you can do is make short-term decisions based on emotional reactions to what you see in the stock market,” said Goetsch.
The longer you stay invested, are committed and are consistent, agreed Garcia, the greater your chance of success.
Preparing people for the unexpected is what a financial plan is for,” said Garcia. I tell clients that the average return on investment is about 7 percent. If you’re getting a 30 percent return on your investment one year, just know your return will drop at some point, and it won’t feel good. But it will feel better if you’ve planned for that day.”
How Do I Know If We Are In A Recession
There are a few ways to tell if we are in a recession. One way is to look at the Gross Domestic Product , a measure of the economy. If GDP growth slows down or turns negative, we are in a recession. Another way to tell is by looking at the unemployment rate. If the unemployment rate starts to rise, its a sign that the economy is weakening.
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Diversification & Asset Allocation
A 401 plan is an investment for the future. And rule number one in investing is not to put all eggs in one basket or opt for diversification.
A diverse 401 portfolio contains a mix of assets like shares, bonds, commodities, and even cash.
Despite its appeal, the stock market is just one of the options for investing. The 401 account holder must carefully choose high-performing stocks from the U.S. and international markets to minimize risks. So that if a single companys shares lose value, the retirement fund can withstand the losses.
But to avoid the repercussion of a complete stock crash, a 401 account should also rely on more stable securities.
One way would be to move 401 to bonds before a crash occurs.
In times of financial uncertainty, bonds tend to grow in value.
Its a phenomenon called the flight to quality. Although theres no guarantee that bonds will increase in value, governmental bonds tend to perform better and carry fewer risks. Thus, they make for a well-diversified portfolio.
Finally, there is also the option of keeping 401 savings in cash. While its good to have some of the assets in cash to protect them from a sudden market crash, keeping the total amount in cash could be risky due to inflation.
