Recent drops in the Dow Jones Industrial Average have some investors, especially those nearing retirement age, feeling stressed.
As usual, the mainstream news isn’t helping. A quick search of the headlines reveals dozens of “scare tactic” phrases such as “Stock Market Misery,” “Economic Slowdown,” and “Deepest Plunge Since October.”
As you already know, acting out of stress and panic is always a recipe for investment disaster, which is why it’s such a shame that so many news organizations seem to focus on the negatives during times of volatility. After all, even when your worries get the better of you, you’re always much better off adopting a defensive investment strategy rather than diving off the deep end and panic selling.
In light of this, here’s a few tips we want to offer to concerned investors who may be feeling some of those stock market woes creeping into their lives these days. Hopefully, these will allow you to put down some of those fears in favor of a smarter, more informed approach to shaky markets.
#1 – Stress Test Your Portfolio
If you haven’t already gotten around to this, now is as good a time as ever. Really, you should try to stress test your accounts during the “good times” so that you can combat your fears before they come to pass. However, it’s never too late to conduct a quick stress test so that you can have a more accurate idea of how much a new bear market or true crash could hurt you.
During a stress test, your advisor should run your portfolio through a variety of past market conditions, such as the crashes in 2000 and 2008, to see how they would have been affected. A well-built and adequately diversified portfolio should produce results that don’t scare you. If you find that your life would truly be “ruined” by these conditions, it’s a big warning sign that your portfolio is too risky.
#2 – Double Check Your Risk
This leads directly into our second tip: make sure that your level of comfortable risk matches the risk inherent in your portfolio.
This is something you’ll want to talk to your advisor about, as different firms have different methods for measuring their clients level of comfortable risk.
At Rowe Wealth, we use something called the “Risk Number” system. This involves a simple test that measures your level of acceptable risk on a scale between 1-100. A higher score means you’re comfortable risking more loss when the market dips.
Once your personal Risk Number has been assessed, your accounts can be scanned to determine their own Risk Number. Ideally, these two numbers should be identical. If your account’s Risk Numbers are much higher than your own, it means you’re risking too much loss. If, on the other hand, they’re similar or lower, it means you can be comfortable in the knowledge that you’re not going to lose more than you can afford, even in the event of volatile markets.
#3 – Assess Your Current “Needs”
How close are you to retirement? Is your 401K something you see yourself needing to access within a few years or can you stand to wait?
Unless you’re right on the edge of retirement, this is probably a good time to remember your history. The market has always recovered from crashes, so if you have time to wait out the bumps, this is a better strategy than panic selling. In fact, if you’ve got the time to spare, you should even look at falling stock prices as a good thing, since you’ll be able to purchase some cheap shares in preparation for a move back to the upside.
On the other hand, if you anticipate you’ll need to pull money out of the market in the next year or two, you may want to talk with your advisor about switching to a more defensive investment strategy in the meantime. You may have safer options when it comes to recouping recent losses if you’re willing to sacrifice some growth potential.
As always, you’re welcome to schedule a call with one of our advisors if you need help with any of the tips mentioned above. We’d be happy to stress-test your portfolio, measure your risk number, and offer advice on re-balancing your accounts if need be.
Click here to see available call times.
As always, invest wisely.
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