June 02, 2022
I bet your investing nerves are a bit on edge these days. That’s totally natural. As I write this, stocks are down more than 18% in 2022, and bonds are having a rough time as well, now that interest rates are rising.
As if dealing with inflation wasn’t enough of a headache!
It is in volatile times like these that making the wrong move can cause long-term trouble. Here’s how to stay out of trouble.
Keep your perspective.
The best move right now might be to take a very deep breath. Yes, stocks are going through a rough period, and as I recently explained in the May 15th episode of my Women & Money podcast, I expect the rest of the year could remain rocky.
If you have at least 10 or more years until you need to use your investments (say for retirement), don’t sell now. Keep your eye on the long-term. Even with the recent slide, the S&P 500 stock index has returned more than 12% annualized over the past 3, 5, and 10 years.
And even if we have a bear market—a loss of at least 20%—you still have time for your portfolio to recover. It typically takes less than three years for the S&P 500 to fully recover from bear market losses. Over the past 30 years, the longest time it took the index to recover was nearly 5 years from the low in the 2000-2002 bear market.
You’ve got time to ride out the volatility and make sure your money is invested for when the markets rebound. I think it is a mistake to sell stocks now, as you run the very big risk you won’t be invested when the markets rally.
The younger you are, the more you have to gain from a bear market. Yep, you read that right. When you have decades until retirement, the best gift is to be able to buy shares of stock funds and ETFs when they are cheaper. That’s what down markets give you: the chance to buy stocks on sale.
Close to retirement? Build bear protection.
For years I have told anyone approaching retirement that they need to have at least three years of living costs set aside in cash, or very short-term bonds, such as Treasury bills that mature in less than a year or so.
This current stock market volatility is exactly why you need to follow that advice. The costliest move in a bear market is to need to sell stocks at depressed prices. That reduces the value of your account, which means when stocks recover, you will have less money that can rebound. If you have a cash cushion of at least three years, you won’t need to touch your stocks when they are down; you can use your cash instead.
Keep it short with bonds.
If you listen to my podcast, you know I prefer investing in individual bonds. But you can’t do that in your 401k. In that case, what I want you to do is find the least expensive short-term bond fund offered. Same goes with an Individual Retirement Account (IRA). A fund or ETF that keeps its duration (the term for the net length of the bonds in the portfolio) to less than three years or so is better in my opinion than “core” bond funds which are popular options with a 401k. Right now, as interest rates rise, a short-term fund will do better than a core bond fund, which these days typically has a duration of nearly seven years.