By Joe G., Branch Manager and Guest Blogger
Three trillion dollars - that is roughly how much Americans lost in retirement savings over an 18 month period by the time the stock market bottomed out in 2009. It is a staggering figure and many investors got out of the market. They couldn’t stomach the losses.
Now nearly four years later it is a different story. The market is moving bullishly along, and the Dow recently hit its highest level since 2007. Some investors are seeing it as a sign that the financial markets have recovered and there’s pretty strong evidence that they’re getting back in. Since the beginning of this year an estimated $55.3 billion has been added to equity mutual funds, according to Investment Company Institute. That’s the highest inflow rate for the first two months of a year in six years.
Investors might be chasing returns, and it could hurt their portfolio. Many are wondering if the market will pullback soon and if it can support higher prices?
What you don’t want to do is react the wrong way at the wrong time and end up either buying high and selling low. So how can you avoid such reactions when it comes to your retirement portfolio?
The Right Asset Mix Matters
Before you react and invest more money or sell, look to see if your retirement portfolio has the right asset mix to support your strategy. For example, sixty percent in equities and 40 percent in bonds may or may not be the right asset mix for you. It depends on how close you are to retiring. Creating an asset allocation plan suited to your time horizon and risk tolerance can help you determine whether it is OK to react and in what way. Because sticking to your allocation can be beneficial.
Rebalance, Rebalance, Rebalance
Even if the market takes a nose dive or you think another financial crisis is on the horizon, you may not want to alter your asset mix unless your retirement plans change or if you’re close to retirement. It might be tempting to react emotionally and sell stocks that are underperforming or start investing more in one that is doing extremely well, but that can potentially expose you to more risk. Something that may not be best suited for your retirement savings. Rather than reacting emotionally, consider rebalancing your portfolio to your targeted asset mix quarterly or annually. It can help your portfolio be positioned well for any change in the market, leaving you with less reason to have a knee-jerk reaction.
Dollar Cost Averaging
Prices are going to swing widely. The trick is to not let those movements get to you and stay focused on your retirement plan. Consider contributing a set amount regularly to your IRA or qualified plan. The regular investments made over time can reduce the impact of price fluctuations. In general, by using dollar-cost-averaging your pay per share will be lower than the actual average price per share, which can help you feel less anxious about your buying strategy.
What strategies or tactics have helped you from having knee-jerk reactions with your retirement savings?
Also of Interest:
Joe G. has been with Scottrade since 2006 and is the branch manager in Parsippany, N.J.
This material is for informational purposes only and should not be construed as a recommendation or investment advice.
Dollar cost averaging does not assure a profit and does not protect against loss in declining markets and, because investing by dollar cost averaging involves continuous investment in securities regardless of fluctuating prices, the investor should consider their financial ability to continue purchases through periods of both low and high price levels.