Should I sit tight and wait for the market to go back up?
I am only 2 years away from retirement. My 401k has taken a big hit because of the current "correction". Most of my investments are in stocks. Should I change my investments to bonds? If I do will this protect my 401k? I need to hold on to what I have left.
You pose a very good question. The recent market volatility has placed quite a few concerns with many investors. When reviewing one’s investment strategy, it is essential to look at a multitude of aspects including: your current asset allocation, your overall goals and objectives, risk tolerance, investment time horizon, and liquidity needs. It is also important to take into consideration total assets and liabilities, your income, and expenses. From here, it is easier to identify which types of investments are right for you in your current situation. So in short, my answer to your question is that in order to give you the best possible answer, I would need to know more information about your financial picture.
Although you are two years from retirement, your retirement funds need to last you throughout your years in retirement. Markets as a whole, are a function of time. Timing the market is extremely difficult to do, due to the fact one must get it right on both the exit and re-entrance. Surely bonds will reduce your risk in your 401(k), but you also must consider the current rising rate environment, if these bonds will outpace inflation, and if they will ultimately yield enough to provide you the best opportunity to live the lifestyle you are either accustomed to living or would like to live in retirement.
In conclusion, when investing, many tend to become emotionally tied to specific securities or their portfolio as a whole. Investors will benefit from the understanding that equity securities tend to outperform inflation and fixed income over the long run. Market conditions and your specific 401(k) scenario are great topics to discuss with an independent financial advisor/planner. After your advisor speaks to you on your specific situation, he/she can help provide you with a suitable recommendation on how to proceed.
Personally, in this market environment I believe most investors, especially those close to retirement should have some type of sell discipline to protect or get somewhat defensive against major downturns. At our shop we began raising cash last week and are now at approx 30%. If the market stabilizes and begins to rise with less volatility we are only one or two transactions from getting almost fully invested using ETFs (in your case probably mutual funds).
The problem with bonds at this stage in the interest rate cycle and likely to continue rising, their risk profile has risen dramatically just in the past year. In fact, bonds have declined as well. If inflation does pick up, they will decline more. So bonds may not be your best alternative. I do think you need some diversification though. But this past week, bonds, stocks and gold all went down in unison. Cash (money market) was the only safe haven. You can dial up and down risk by your cash allocation.
That's my two cents. Best of luck, Dan Stewart CFA®
I would advise you to look at your life expectancy as your time horizon, not retirement. Then decide if you are investing too aggressive for your personal risk tolerance.
Hi, thanks for your question! The unfortunate reality is that there is no way to truly predict what the markets will do in the future. In fact, there is a famous case study that “proves” the most accurate way to predict the movement of the S&P 500 from ’83-’93 was the production of butter in Bangladesh. Research has shown that attempting to time the market almost always proves to be a bad move. My recommendation is to work with a fee-only financial planner to help you better understand your current situation and how changes in your investment strategy can support your goals for retirement. Oftentimes, we think only in terms of return, and not risk. A CFP will be able to help you run different scenarios to give you a better picture of your retirement. Check out www.letsmakeaplan.org to find one near you. Thanks!
I don't think it is a good idea to move completely into bonds based just on the recent correction. Bonds are not a solution to everything- on one hand they have interest rate risk especially in the current environment and over the long term, they may not produce sufficient returns to help you in retirement (Shortfall risk)
The market fell by 10% recently- that is just a blip considering the bull market we have had since 2009. Hopefully, you were appropriately invested to take part in the rally thus far. Since you are nearing retirement you should evaluate your cash flows (Income and expenses) during retirement, your assets and liabilities and your risk tolerance. That should give you an idea of what realistic returns your portfolio needs to generate and what kind of liquidity you need. You can then plan and invest for the long term.