Last year, the markets hit a number of milestones. The Dow broke the 24,000 mark for the first time, and the S&P 500 closed at a high of over 2,600. (1) And then there’s the fact that we’re experiencing the second-longest bull market since 1929.
While it’s good when the markets are high, it’s also a time when investors can make mistakes in an attempt to capitalize on their opportunities for high returns. But if there’s one thing we know about the markets, it’s that they’re constantly fluctuating, and when they’ve been up for awhile, they must eventually come down.
Now is an ideal time to be proactive and take action to protect yourself and your hard-earned money. Here are a few actions to take when the markets have been enjoying a high streak.
1. Revisit Your Risk Tolerance
How much are you really willing to lose? We like to use the term “irreplaceable capital” when analyzing the amount of risk you have in your portfolio. Irreplaceable capital is the amount you are determined to protect at all costs. Irreplaceable capital strategies are all about protecting your downside while still allowing you to participate in some of the upside.
This is especially important if you are within 5-7 years of retirement, because if you experience significant losses while also withdrawing income distributions, it could have a devastating effect on the longevity of your retirement savings.
2. Consider Alternative Strategies
Just because you’ve always invested in the S&P 500 doesn’t mean you can’t get creative. If you want to protect your assets, think about moving into a short-term muni or corporate short-term bond ladder.
You could also explore long/short equity or credit investments or even event-driven investing. These strategies are not market-driven, so you can tap into a decent yield without worrying about whether rates are going up or down.
3. Avoid Emotional Investing
One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (2) Simply put, behavioral biases lead to poor investment decision-making.
4. Be Proactive With Your Retirement Accounts
Can you name the investments in your IRA or 401(k)? When was the last time your portfolio was updated or rebalanced? The truth is, people rarely login to their accounts. They set their allocations and forget about it. But just as life changes cause you to adjust your budget and lifestyle, market changes should provoke you to take control of your asset allocation.
Here are some tips to get your retirement accounts in the best shape for a market correction:
- Factor in your other assets when choosing allocation. If you have a separate investment account that also holds the same allocations, you won’t have enough diversification.
- Don’t look at past returns and choose the successful ones. Buy where the market is going, not where it’s been.
- Reassess your default contribution rate. Have you changed your rate since you set up your account? There may be times when you need to decrease it, but there will also be opportunities to increase your contribution and put your finances ahead in long-run.
Perhaps the most important piece of advice we can give you is to have a personalized game plan for the future. Don’t get caught off guard when the markets shift, and take the time now to set up a plan and make it happen.
At Mason & Associates, our goal is to design an investment portfolio that has the flexibility to meet your needs. Your involvement in this process is key, as we advise you based on your personal risk tolerance and investment objectives. We meet with you regularly to review your portfolio, and with our ever changing financial markets, we are prepared to make adjustments as needed. As your goals and objectives change through different stages of your Life Plan, we make the necessary changes to your portfolio to keep your investments in line with your goals.
To learn more about implementing some of these steps and reassessing your portfolio, contact us for a consultation. Call our office today at (323) 254-3072.
About Mason & Associates, Inc.
Mason & Associates, Inc. was founded in 1989, specializing in Life Planning for individuals, families and small businesses. Life Planning places a person’s core life values at the heart of the advice process and focuses on the human aspects of financial planning.
As a client, your personal story is key to our planning process. That is why we strive to build a close relationship that will encompass every aspect of your life. Together with our team of professionals, we guide you through the process of identifying what is important to you, your goals, your dreams. We then put into place a financial road map to set you on your way towards achieving your objectives.
Our responsibility does not end there. As you encounter bumps in the road, changes in goals or any other roadblocks, we are there to offer advice and guidance. We are there to celebrate your successes and cope with your challenges. We work alongside your other professionals such as your attorney and your CPA to be sure all of your legal and financial needs are aligned.