How to Protect Your Retirement From this Growing Risk

A recent poll reported that investor confidence is at the highest level since 2000, and nearly 70% of investors are optimistic about the stock market’s performance for next year.

None of us know for sure what the future will bring. Maybe 2018 will be another strong year for stocks. Or, maybe not. It’s important to keep in mind that this bull market is one of the longest on record; it started in the spring of 2009.

Even if you’re an optimist, and even if 2018 is indeed another good year for the stock markets, I want you to take the time right now to check your retirement portfolios are ready for whatever the future brings. My strong advice is to check your 401(k) and other investment portfolios and make sure your mix of stocks and bonds is what you want it to be. For example, if you decided that a portfolio that was 60% invested in stocks and 40% invested in bonds was the right mix for you, have you checked where you’re at today? If you haven’t touched your portfolio in years it’s likely your 60/40 mix is now 70/30, or even more out of balance from your goal. That means you’re taking more risk than you probably intend.

That’s why the most important investing step you can take right now is to rebalance your retirement portfolios. Log on to your account and check what your asset mix is. If your stocks are now too big a piece of your investment pie, it’s not hard to get it back to where you want.

In 401(k)s, 403(b)s and Individual Retirement Accounts you can change your investments without triggering any tax bill. A few clicks of your mouse and you can “exchange” stock shares for bond shares, or cash.

An extra bond tip: Bond funds react to changes in interest rates. When interest rates rise, bond fund prices fall. The longer the maturity of the bonds in a fund, the bigger the price decline. I do not want you to invest in long-term bond funds at this time. Interest rates are still very low, but the Federal Reserve has been raising its (short-term) interest rate, as it is trying to slowly push rates off of their historic lows from the financial crisis.

No one expects big changes in interest rates in 2018, but you never know. Bonds with short or intermediate-term maturities (say, no longer than five years or so) can help steady your portfolio during periods when stocks are falling, but they have less risk from rising rates than bonds with maturities of 10 or 20 years or more. Please, avoid long-term bond funds at this juncture.