Focus on long-term goals to ride out market swings
The stock market has been on a punishing roller coaster ride this week, suffering its largest one-day drop in more than 30 years Thursday, on concerns that the spread of COVID-19 will hit the global economy hard.
While stocks made gains during Friday trading, it’s safe to say that volatility with a capital V is back – a situation that probably only day traders like. For the rest of us, trying to ignore market free falls is not a bad strategy, especially when it comes to a long-term goal like retirement.
That’s because one of the best ways to make sure your retirement accounts survive economic turbulence is to fortify those accounts as well as you can and then go do something else, come what may.
“Don’t get caught up in the motion of the market when investing for a long-term goal,” says Chris Remedios, a certified financial planner with Remedios Financial Planning in San Francisco. “If it makes you uncomfortable when things go down, don’t look.”
Taking the steps below will help protect your IRA, 401(k) and other retirement accounts from events beyond your control.
1. STAY INVESTED
During big market swings, your investment portfolio could well lose money. This is where ignoring the market becomes important if you’re investing for retirement.
“You have a long-term goal – try to focus on that long-term goal and not the short-term volatility of the markets,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research.
If the turbulence has you worried, don’t forget that though the market is falling, it’s falling from record highs. Investing in the stock market remains the best way to achieve long-term growth.
2. CHECK ON YOUR DIVERSIFICATION
Even a diversified portfolio can lose money, but diversification helps stem your losses by reducing investment risk. You want to be sure you’ve spread your money around so if any stock market sector crashes particularly hard, you’ve got investments in other sectors providing stability.
“Don’t be too exposed to one or two stocks. We see a lot of individuals who are invested all in one company,” Williams says.
While investing in single stocks can be risky, a single mutual fund can be completely diversified. Target-date mutual funds offer one-stop-shopping convenience, because they invest in a broad swath of stocks and bonds. Alternatively, you can build your own simple retirement portfolio to get you to your goals. Here’s more on how to invest your IRA.
3. BALANCE STOCKS, BONDS AND YOUR TIME FRAME
Asset allocation means figuring out what percentage of your money goes to which investment. At the highest level, that means how much money you have in stocks versus bonds.
Your time frame is important here. If you’re decades away from retirement, a hefty allocation to stocks makes sense, even when the stock market is tanking because you have time to let your money ride that out. Just how hefty your allocation is will depend on your risk tolerance.
But if you’re closer to retirement, make sure any money you’ll need for living expenses in the next five years or so is in cash or a cash-like investment such as short-term bonds.
“A rule of thumb is to have about 60% in stocks and 40% in bonds or cash at the retirement date. Moving toward that is a good way to be prepared for a down market,” Williams says.
4. CONSIDER BUYING AT A DISCOUNT
If you’re in your 20s, 30s or 40s and don’t have plans to retire until you’re in your 60s, time is on your side. Don’t sell out of the stock market when it starts dropping.
In fact, a better strategy might be to buy more shares. “A down market just means you’re buying stocks on sale,” Williams says.
Even in your 50s or older, buying might be a strategy for you too, given that retirement may last as long as two or even three decades.
5. PAY DOWN DEBT, SAVE FOR EMERGENCIES
While you’re aligning your investment strategy with your long-term goals, assess your overall personal finances, too.
A stock market correction can be the push you need to clean up your finances. Smart steps to put on your to-do list include paying down debt and building an emergency fund. Moving forward on those goals sets you up to better weather any economic headwinds ahead.
And don’t think you have to get to perfect in 60 seconds or less. It’s OK to take small steps toward each goal. For example, just $500 to $1,000 in a savings account can help provide a safe harbor from rough economic waters.
This article originally appeared on the personal finance website NerdWallet. Andrea Coombes is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @andreacoombes.
NerdWallet: What is an IRA?
NerdWallet: Simple portfolios to get you to your retirement goals
NerdWallet: How to invest your IRA
NerdWallet: Risk tolerance: What it is and why it’s important