Stock market crashes are tough. Most of us will spend our entire working career saving money for retirement, investing a lot of that savings in the stock market. Why the stock market? Because history has shown that stocks are among the highest returning investments over time. Most investors need a high growth rate on their investments over their working career to accumulate enough to provide adequate income in retirement. The problem is you can’t get that level of growth without experiencing big dips – or “crashes”. You also can’t rely on timing the market to get out before a crash because the stock market is unpredictable. So what can you do?
- Keep a solid cash reserve outside of your investment accounts. The financial planning rule of thumb is to keep 6-12 months of living expenses in safe liquid place (i.e. bank savings or money market account). Market crashes are nasty and can often lead to unemployment as companies try to cut costs to stay alive. This is the time when you want to have a cash buffer in case you have a disruption in income. You will not want to pull from your investments after they just lost a substantial amount of money.
- Stick with your plan and don’t let fear drive your investment decisions. Communicate your retirement vision with your financial advisor, develop a plan to get there, and stay the course. This is easy to do when the market is soaring and tough to do when the market tanks. Selling your stock after the market has crashed doesn’t help your plan. It helps someone else’s when they buy those stocks from you on the cheap.
- Don’t fall prey to insurance sales people with the “perfect investment” that never loses money. Insurance companies spend a lot of money on advertising targeting the fears of individual investors. Recently, they have created indexed annuities that, “have the upside of the market with none of the downside”. While it’s true they will not lose money, their upside is severely capped and they often require the money invested in them to be locked up for several years. Be careful with annuities because of their high costs and surrender charges (click here to learn why you do not need an annuity in retirement).
- Rebalance! If you have an investment portfolio that is 60% in stocks and 40% in bonds and the stock market just lost 30% of its value, you now have a portfolio that is made up of 42% stocks and 58% bonds. You can now shift 18% of your bonds into stocks that are now 30% cheaper! Work with your financial advisor to develop a plan for rebalancing that fits your retirement vision.
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