If you’ve kept an eye on the markets at all this year, you know that it’s been one of record highs. Just recently, the Dow broke the 24,000 mark for the first time, and other major indices continue to grind higher. (1) And then there’s the fact that we’re experiencing one of the longest bull market runs in recent history. At eight and a half years, many people wonder how much longer the market can climb before we start to see a meaningful pullback.
It’s been less than a decade since the financial crisis hit, and the devastating losses are still fresh in many investors’ minds. It’s not surprising that many of us, particularly those nearing retirement, are worried about the impact a market downturn may have on their investment portfolio. It’s easy to get excited and comfortable while the markets are soaring and returns are positive, but what happens if we see a meaningful downturn in the markets?
Avoid Emotional Investing Decisions
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a market downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms.
Adhere To Time-Tested Principles
If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your 401(k) can handle market volatility. Here are a few ways you can accomplish this:
Start with a Firm Foundation
Choosing the funds and amounts in your 401(k) can be confusing. You don’t want to pick them at random or settle on an investment out of confusion. While you can re-adjust your allocation after the fact, it’s better to start off on the right foot. When you set up your account, take the time to speak with a financial professional who can help you determine your time horizon and risk tolerance. These two factors will drive your asset allocation, help you align your risk to your situation, and strive to limit the downside to your comfort level.
Have a Long-Term Perspective
The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.
Maintain Proper Asset Allocation
Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn. I like to meet with my clients at least once a year to review their portfolio and make adjustments as needed.
Know the Facts
Knowledge is essential for making informed decisions. Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with all of these steps, you may not need to take action during a market slump, and it may make more sense to stay the course.
Prepare Yourself And Your 401(k)
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bull and bear markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
About Rocklin Senavinin, CFP®
With nearly 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long-term. To learn more, connect with Roc onLinkedIn or visitwww.fidwm.com. If you have questions, feel free toschedule a phone call using this link.
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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