With the Dow Jones Industrial average up nearly 6,000 points since the start of 2017, turbulence has made a comeback in equity markets. While its important to always be aware of market swings and movements, you also need to remember that equity market pullbacks and corrections are a part of investing. Here are three ways to keep control during market volatility and stay on track for your retirement goal.
1. Take a deep breath and put Stock Market Volatility into Perspective
Historically, a market correction, or a 10% decline, happens approximately once a year. A 5% pullback happens about 3 times a year, however in the last few years that has not been the case. 2017 was a year of limited and low volatility, so many investors were not ready for these large declines. Also, typically these pullbacks happen over a longer period than two days. According to investment firm Deutsche Bank, the stock market, on average, has a correction every 357 days, or about once a year. Our last correction was about two years ago, and corrections have generally been quite infrequent since the Great Recession. While this might not be the end of the equity markets fall, it might be helpful to put these media grabbing falls into perspective.
Also, it’s nearly impossible to predict what'll cause a stock market correction. Stock market corrections could come about within any time frame (every few months or after multiple years), and they can be caused by a variety of issues. While sometimes, a stock market correction may be inevitable, one thing they typically aren't is predictable.
2. Revisit your Investment Strategy and Risk Tolerance
Stock market corrections are a good reminder to reassess what you own. It’s also a good time to focus on YOUR personal goals and strategy. This includes making sure you are comfortable with your time horizon and risk tolerance for your retirement goal. If it has been over 12 months that you had a review of your investments holdings and risk tolerance it would be worthwhile re-assessing your strategy and holdings.
Given we are in a rising rate environment re-examining the duration in your bond holdings is a worthwhile consideration. Longer term bonds tend to be more sensitive to rising rates than shorter term bonds would be one of many examples of something to re-examine in your portfolio. Another example would be your allocation holdings. For example lets assume 3 years ago you determined that an appropriate portfolio given your risk tolerance, time horizon and retirement goal was a balanced portfolio with a mixture of 60% in stocks and 40% in bonds. Over these last couple of years you haven’t revisited your strategy and given the markets run over the last few years your portfolio is now 70% stocks and 30% bonds; you may be taking on more risk than you realize.
This is where a regular review of your portfolio would help you monitor your holdings and if any of your holdings have fallen out of favor; which might call for them being re-positioned. Now is a great time to do this if you haven’t in the last 12 months. Its important that you be prepared. Market volatility should cause concern, but panic is not a plan. Market downturns do happen and so do recoveries. This is the ideal time to ensure that you fully revisit your time horizon, retirement goal and risk tolerance. Looking at your entire picture can be a helpful exercise in determining if you should make any adjustments to your investment plan.
3. Stress test your retirement
The term “Stress Test” might make you think of someone struggling to run on a treadmill with the doctor in a lab coat and clip board in hand closely standing by. However, what I am referring to here is a tool used in Financial Planning called a Monte Carlo* simulation. A Monte Carlo simulation is a method of testing an outcome over a range of possible variables. Essentially it can perform a stress test for your retirement goal. Monte Carlo simulations are used in retirement planning to predict the success of your overall retirement goal that you help outline. A Monte Carlo retirement analysis will consider your level and rate of savings, the income you want in retirement, taxes, inflation, how long you expect to live, among many other things and give you a probability of success.
With this information in hand you can course correct your plan early enough to make an impact for your retirement goals. You might be doing a great job saving 10% of your income into your 401k, but without a clear goal in hand it’s hard to determine how far or near you are to the retirement you have been saving for. Having a Monte Carlo Retirement Calculation prepared can give you a very important insight to the track that you are on for your overall retirement. Even if you are already retired this analysis can give you an understanding of how much of a solid footing you are on to maintain your retirement standard of living throughout your retirement. To get a small glimpse on your own of how a retirement calculation looks you can use our investment plan goal calculator by clicking here.
Consider these 3 points that I have laid out here to help stay level headed, focused on your long term plan and avoid any panic decisions that could negatively affect your retirement goal.
* The projections or other information generated by Monte Carlo Analysis tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time.