The last couple of weeks have been a bumpy ride for investors with large holdings in U.S. equity markets. For example, the S&P 500 index made major gains, closing above 3,000 for the first time ever on July 12, and hitting a record of 3,026 two weeks later.
Since then, the S&P 500 and the Dow Jones industrial average have whipsawed — with both falling as much as about 3% in one day alone, Aug. 5 — amid rising tensions in the U.S.-China trade dispute. After all the swings, the S&P is down approximately 5% from its record, as of Aug. 8, but it is still up approximately 18% for all of 2019 — a solid return.
Still, when the market slides so much in one day, it’s normal for people to wonder if they need to make changes to their investments. My view is that it’s not the time for people to make any drastic changes in their investment portfolios. Stock prices don’t go up every day, month or year. Corrections and even bear markets are normal.
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For investors who are accumulating money for retirement, stock declines can be an opportunity to buy stocks at lower prices. For those who are not in the accumulation phase, it’s a good time to review your current investments and modify your portfolio to fit your tolerance for risk.
Investors, regardless of their risk tolerance, should focus on their long-term goals. Here are five recommendations that can help guide you to make the right investment decisions to meet your needs:
1. For starters, don’t panic.
Making drastic changes to your investment portfolio — like moving most or all of your investment accounts into cash — may feel like the safe decision now, but such emotionally driven decisions are almost never a good idea. It’s important to have a long-term investment plan that you can stick with through the inevitable ups and downs of the market. Otherwise you’ll be subject to the whims of your emotions, which often leads to buying stocks near market peaks and selling near market bottoms.
2. Next, take a close look at your current portfolio.
Investors who are extremely anxious about the recent pullback in stock prices should consider re-aligning their portfolios by reducing the percentage of stocks. People with a lower risk tolerance will sleep easier and be better prepared if the stock market decline continues and turns into a bear market, which is defined as a decline of 20% or more in stock prices, if they lower their allocation to stocks now. Adjusting your stock-to-bond ratio by 10% or 20% is much smarter than going “all in” or “all out” of any asset class. If a portion of your portfolio is not in stocks or investments that can grow like stocks, in order to have enough money to retire, a person will likely need to save more money or work longer.
3. Be ready to rebalance.
Just as it is important to rebalance your account during a bull market to keep your stocks and bonds on target, have a plan in place to rebalance your portfolio if further stock declines occur.
4. Pump up your 401(k).
For people who are still working, set aside more money into a 401(k) or business retirement account before the end of the year. Those under age 50 can contribute up to $19,000 this year to their 401(k), while those age 60 and over can contribute up to $25,000. Regardless of whether stock prices are up or down, it’s wise to maximum fund your 401(k) each year you’re working. What you save can have a much greater impact on your ability to meet your retirement goals than the returns in your portfolio. Saving puts you more in control of your financial future.
5. Remember that you’re in it for the long haul.
The stock market will periodically experience wide swings, but don’t allow the daily ups and downs to deter plans to invest for the long haul. Continue to make periodic investments that will pay off down the road. Always remember it’s “time in the market” not “timing the market” that leads to successful investing outcomes.
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