Stock market corrections, crashes, and bear markets are a reality of long term investing. They have happened before and will happen again.
Here are 10 tips for weathering these investment storms:
1. Remain Calm
Watching the stock market lose value is not fun. However, don’t panic.
Historically, those who remain calm and stay the course with their investments are rewarded with a big bounce in due course.
Unfortunately, many retail investors (regular people who invest their money themselves) get nervous as prices trend downward. It is not uncommon to hear stories of people getting nervous and selling at the market bottom and then not re-investing, missing the market recovery. This is the single biggest reason that retail investors typically lag overall market performance.
We can not predict what will happen, but acting calmly is bound to serve you well. Do not panic is the first rule of protecting your long term financial health in a downward trending market.
According to Investopedia, between 1980 and 2018, the U.S. markets experienced 36 corrections.
- Ten of these corrections resulted in bear markets, indicating an economic downturn.
- The other 26 remained or transitioned back into bull markets reflecting economic growth and stability.
The average market correction is actually pretty short-lived lasting anywhere between three and four months.
According to data, of the past 20 corrections, only two lasted longer than 100 trading sessions. The longest recent stretch in correction territory was a period of 229 trading days that ended in 1978.
If you owned $100,000 of a stock index during a 20% correction, you might say that you lost $20,000. This might feel awful.
However, it is important to remember that if you don’t sell, you only actually lose that money on paper. Don’t focus on the virtual losses, consider what you stand to gain if you can stay invested.
The number one rule of stock market investing? Buy low, sell high.
Stock market corrections are a tremendous opportunity to invest money, if you have any available.
A Roth Conversion is when you transfer money from a traditional IRA or 401k to a Roth IRA. When you do this, you pay income taxes on the amount you convert. However, once those assets are in the Roth, they grow tax free, and you do not pay taxes on the withdrawals you make in retirement.
So, doing the conversion when the value of your portfolio is down and you think there is potential for long term growth can be a great idea.
Model a Roth Conversion in the NewRetirement Planner.
In an inflationary period, the value of cash goes down. A dollar buys less and less with every passing year.
On the other hand, stocks and stock markets generally trend upward.
Cash — whether it is buried in your mattress or sitting in your checking account — is usually a terrible way to hold money, especially money that you are saving for long term goals like retirement.
Imagine that you have $50,000 that you do not need to spend for 25 years.
- If you keep that money in cash. You will still have $50,000 in 2042 (25 years from now)
- That $50,000 will likely buy much less than it can now.
- If you put the money in a checking account, you might earn 3% on your money. But, with inflation at around 8%, your real returns would be negative 5%.
- However, if you invested your money and earned a conservative 6% rate of return and assuming inflation goes lower, you would have: $223,000 — more than four times the amount you started with!
If you experience losses in retirement investments, you are not necessarily in the poor house, especially if you consider alternate sources of wealth before selling stocks that are down.
Here are some of the best and worst sources of emergency money.
Panic selling is when you get so worried that a market correction is going to continue that you quickly sell. This can be disastrous. Not only are you selling at a low point, but you are likely to miss out on big gains when the market bounces back.
You might be surprised to learn that the stock market’s best trading days typically occur within two weeks of its worst days.
See tip #2 for financial decision making.
Yes. The stock markets go down. However, looking at the historic trajectory of the markets, things have only gone up over the long haul.
The reason that retirees get nervous is that not everyone can have a long-term perspective. In retirement, you might need to withdraw money for living expenses this month, this year or within the next five years.
Money you will need in a relatively short time period should probably never be invested in the stock markets. However, money that you will use in the future can be invested in stock markets — just preferably not individual stocks which do have significant risks. Index funds can sometimes be a good way for retirees to enjoy growth for their longer-term assets.
You’ve heard it before, proper preparation prevents poor performance. The adage is particularly true when it comes to your financial health. Here are tips for preparing for a down market:
If you are considering stock investments, you need to think hard about how much money you need and when and make sure those funds will be available to you — no matter what the markets are doing at that time. The NewRetirement Planner lets you see this in great detail.
The bucket approach is advocated by many retirement experts.
- In one bucket you maintain liquid assets — cash or other low risk investments in an amount to fund 1-3 years-worth of your retirement withdrawal needs. The reason for this bucket is to avoid the need to liquidate equities during periods when the stock market is down, realizing steep losses.
- The second bucket might contain up to five years-worth of living expenses and be invested in a combination of income producing investments and some that offer moderate growth opportunities.
- The third and most aggressive bucket will be predominately invested in stocks and more aggressive fixed and alternative type of investments. This bucket is designed for growth and to help you avoid running out of money by being too conservative.
The actual percentage allocation to each bucket will vary by household and how much you need and want to spend over what time period.
The NewRetirement Planner helps you figure out how much savings you need in different buckets. This award winning tool can also help you visualize what your retirement budget will be, how much income you will rely on from savings and investments over the course of your retirement and much more.
Many people think that you should avoid the stock market with money intended for retirement. This is not usually the best strategy. Stocks can do a good job of helping your income and assets grow and stay ahead of inflation.
However, you don’t want to “keep all of your eggs in one basket.” You want to figure out a diversified portfolio of an array of financial vehicles.
Consider bonds, cash, real estate, derivatives, life insurance, annuities, precious metals and other types of investments.
You also want diversified holdings within each asset class. For example, for stocks you would not want only large oil and gas companies. Instead, you might want a mix of small and large, international and domestic companies in different fields.
Not sure about the right mix of investments for your needs? Consider working with a pre-screened and fee only fiduciary financial advisor. Schedule a free discovery session with a Certified Financial Planner (CFP)® from NewRetirement.
If you want to be invested in the stock markets, consider index funds to give you broad exposure to the markets and not individual stocks which are much riskier.
Warren Buffet is famous for saying: “What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
It is a good idea to know something about the companies whose stock you own and to really believe in them. You will be less likely to panic and sell in a major downturn if you actually understand what the company does and know enough about the industry to project whether or not there will be a market for whatever the company makes in the future.
Annuities can be a great way for those in or near retirement to stabilize a portion of their income. Some feel this is another leg on the retirement income stool along with Social Security, pensions and your various investment accounts.
You probably don’t want all of your savings in an annuity. However, you might want to consider purchasing an annuity to guarantee income that you could not live without.
- If you are considering any annuity you really need to shop around. Beyond what is offered by those actively trying to sell you an annuity, look at low cost, no-load options like those offered by Vanguard and others.
- It is appropriate to ask how much you would receive in monthly income from several carriers and compare the answers. You will find that the payments may differ widely for the same annutization option.
- Another key question is how much of your nest egg do you want to commit to an annuity?
You might also want to explore other ways to produce retirement income.
You’ll be much better off in a market downturn if you have already created a highly detailed and completely personalized retirement plan that can easily be updated when things change.
If you have a plan that is easy to update, then during a crash you can quickly run different scenarios and really assess the impact to your near and long term financial health.
The NewRetirement Planner is one of the the most comprehensive and powerful tools available. Forbes Magazine calls the system “a new approach to retirement planning” and it was named a best retirement calculator by the American Association of Individual Investors (AAII) and CanIRetireYet.
Investing and asset management is complicated. Have you considered working with a financial advisor? NewRetirement Advisors aims to make working with an advisor easier, more fun and very cost effective. We use the NewRetirement technology platform to collaborate with clients for strong financial outcomes — in both good and bad economic times.