The Dow Just Fell 1,500 Points. Here's How to Protect Your Investments Against Stock Market Volatility
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It's no time for investors to get complacent.
The S&P 500 may have erased its losses for the year earlier this week, but volatility returned with a vengeance on Thursday afternoon, with the Dow plunging more than 1,500 points. Uncertainty remains over how the coronavirus may play out in months to come -– and what that will mean for the market going forward. It's a good time to make sure your portfolio is in order.
The pandemic has highlighted that you need to have a plan in place before market volatility arrives, says Mark Connely, CFP, a financial advisor with Wealth Design Group and Park Avenue Securities. And the plan can’t just be buy and hold –- it should be buy and rebalance, ensuring that you have a diversified portfolio with a wide variety of investments.
“When you change after the fact, that is the most dangerous strategy you could ever do," Connely says. Once you choose a plan, “stick with that, because anything else is a prediction of what will happen, and no one knows.” In other words, don't pull your money out of the market on a day like Thursday, as scary as the gyrations might be. Trust your plan and stay the course.
Proper asset allocation ensures you have a diversified portfolio, meaning you have investments that may each react differently to a change in the market. That way, you don’t have to change your plan when the market gets tough. Even if you miss out in one aspect of your portfolio, you have a chance to gain elsewhere. In March, for example, Treasury bonds held their ground as stocks tanked.
Your exact asset allocation should match the amount of risk you’re willing to take (that risk should be based on your age, your specific financial situation and overall investment goals). The old rule of thumb was to subtract your age from 100 to find the percentage of your portfolio that you should keep in stocks, but many financial planners now recommend 110 or 120 minus your age to get the extra growth stocks can provide, says Corey Walther, President at Allianz Life Financial Services. The rest should be in bonds (keep an emergency fund in cash outside your retirement account.)
Don’t just stick to large company stocks, which tend to be the companies you know. Most portfolios are drastically overweight towards the S&P 500, Connely says. Because everyone knows Apple and Amazon, for example, there’s a “herd mentality” to stick with stocks from those companies that have done well, he adds. But then you’re missing out on the small and value companies that may have more risk, but also bigger rewards. Connely recommends investing in a mix of large and small U.S. companies, then repeating that in the international market. Morningstar typically recommends allocating about 25% of your total assets to international securities for investors with long term horizons, according to Amy Arnott, a portfolio strategist for Morningstar.
If your asset allocation strays from your target, you can rebalance. That is, you sell some securities that have appreciated in value and buy others that have lagged. (Good news: if your 401(k) is invested in a target-date fund, that will do the rebalancing for you.)
There’s debate among experts about how often you should rebalance your portfolio, but Walther recommends doing so at least annually. Once you determine how often you'd like to rebalance, stick to that pattern.
Also consider annuities as part of your diversification conversation because, not only do they provide the guaranteed income people will need for a long retirement, but they also address rising living costs, Walther says.
“Every time there’s a correction, money gets transferred to those that are disciplined from those that are not disciplined,” says Connely. “If you are not diversified, then you have turned investing into a casino.”
This story has been updated to reflect market moves Thursday afternoon.
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