CHICAGO (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)
Investors may be feeling whiplash after the biggest one-day percentage declines for the S&P 500 and the Dow Jones Industrial Average in over six years on Monday coupled with Tuesday’s rebound of about 2 percent for the major indexes.
Near-retirees like Christopher Sanford, who got spooked when stocks on the S&P 500 fell 57 percent through the bleak market years of 2007-09, do not know what to do protect their nest eggs now.
”I was caught by surprise in 2008 - like a deer in the headlights - and I promised myself not to let it happen again,” said Sanford, a 52-year-old auto mechanic from Buffalo Grove, Illinois.
The standard financial advice in volatile periods is to stay the course and not look at your retirement account statements.
It is a good time to ignore conventional wisdom, however, as your portfolio may be far more exposed to stock market dangers than you actually intend it to be. That is due to an almost 300 percent surge in the S&P 500 from the stock market low in March 2009 to the end of 2017.
Mark Riepe, who heads the Schwab Center for Financial Research, looked at what would happen if a moderately conservative investor allocated 55 percent of their portfolio to stocks and 45 percent to bonds, at the beginning of the recovery on March 9, 2009, and then took the “set-it-and-forget-it” approach that many of us follow.
Without any tinkering, 72 percent of the investor’s money would be allocated to stocks at the end of 2017, fueled by strong market gains.
Analysts do not think Monday’s downturn is the start of a bear market. That is generally defined as a decline of at least 20 percent and since 1903, has lasted about 19 months, according to the Leuthold Group.
But there will be a bear market at some point - they arrive every five years on average.
Preparing your portfolio for a bear market amid calm is a key, said Riepe.
”Focus on getting the job done whenever the portfolio is sufficiently out of whack to justify it,” said Riepe.
Just look at how steep losses could have been in various portfolios during the last bear market.
For example, a 100 percent allocation in stocks would have meant losing more than half of your money. Dividing a portfolio up 50/50 between stocks and bonds, by contrast, resulted in a 22 percent loss.
If you work with a financial adviser, ask if they use Riskalyze, an online service. That is one tool that can help you envision the dollar loss you would have incurred in your portfolio in the last downturn as well as the time needed to recover.
Keep in mind that portfolio tweaks in brokerage accounts can cost you in fees as well as taxes, so the approach is to make changes in IRAs and 401(k)s that can be done free of capital gains taxes.
(You typically do not pay capital gains taxes in tax-deferred accounts like IRAs and 401(k)s, although you may have to pay fees for professional advice.)
Financial advisers typically suggest that people keep money out of stocks if it will be needed within five years to pay for something like college, a house down payment, or retirement.
For other money, they often suggest “rebalancing,” or cutting back on overdoses in stocks or bonds whenever they go 10 percent over original intentions.
As logical as rebalancing sounds, people still have a hard time springing into action. Sanford, for example, knew well before this week that he needed to tweak his portfolio because his son is in college and his savings are almost entirely in stocks.
With retirement about seven years away, Sanford is worried about his nest egg as well as his health.
”My bones are tired, and I have arthritis in my fingers,” he said.
Riepe says he knows it is tough to stomach a big move away from a winning investment.
“It doesn’t have to be done all at once,” he noted.
If you have a 401(k), for example, simply stop putting new money into stock funds. With each paycheck, route that money into bond funds and money market funds.
A caveat: bond funds can incur losses if interest rates rise as some analysts now expect. Riepe said money market funds could be an alternative for some of the bond allocation.
Editing by Beth Pinsker, Lauren Young and G Crosse