The Stock Market Is Having Its Worst Year in a Decade. Here's What to Do Now, Depending on Your Age

The stock market has been pretty scary since October. Don't panic: There are smart, simple moves you can make to protect your portfolio, no matter what age you are.

For the first three quarters of 2018, it looked like another great year for U.S. stocks. As recently as September 20, the S&P 500 hit an all-time record. Since then, however, fears about rising interest rates and political dysfunction have rattled markets. In the past three months, stocks have tumbled almost 10%. The upshot is that the S&P 500 is set to return just 0.27% for 2018 – its worst showing since the 2008 financial crisis.

Given the recent trends -- and the fact that many economists are predicting a recession by 2021 or sooner -- here are some steps you can take to protect your portfolio.

If You're Young, Ignore the Turmoil

For younger investors – with 80% or more of their portfolios in stocks – your best bet is to simply ride out the next bear market, whenever it comes.

“Stay disciplined and keep funding your 401(k),” says Salt Lake City financial planner Devin Pope, pointing out that in some ways a downturn is advantageous to young investors. It gives them a chance to buy stocks at discounted prices.

While seeing your hard-earned savings lose value isn't easy, you might not have to endure it as long as you think. For instance, an investor with 90% in stocks and 10% in bonds at the start of the financial crisis in 2008 would have been down more than 40% in March 2009, when the market bottomed out. But, assuming they avoided cashing out, they'd have broken even by mid-2011, just over three years later, according to data from Morningstar. By the start of this year, they'd have more than doubled their money.

“The best idea is to turn off CNN and stop listening to the talking heads,” says to Huntington, N.Y. financial planner Jon Ten Haagen.

If You're Older, Preserve Purchasing Power

Older investors, especially retirees, can't afford to be as aggressive as younger ones. That's because once you start using your portfolio to fund living expenses, you can no longer expect to just ride out the next downturn. In the worst case scenario, you could be forced to sell stocks to cover your monthly bills right at the moment they're at their least valuable.

That means, at a volatile time like this, it can be tempting to move the bulk of your assets to bonds. Bonds tend to more or less hold their value even in dramatic bear markets, meaning your purchasing power is preserved no matter what the stock market does in any given year. There's a problem with that approach too, however. In the long-run, bonds don't offer the same returns as stocks. If you're like most retirees, you'll need to count on the stock market's long-term growth potential to make sure your savings last through a long retirement.

So what to do? Financial advisers recommend investors who are close to or have just entered retirement move 50% to 60% of their savings to bonds to weather downturns and keep the rest in stocks to ensure long-term growth. A portfolio that's 60% bonds and 40% stocks should decline less than 20%, even in the worst years, according to a study of historical stock-market returns by Vanguard. Meanwhile, that 40-60 portfolio will still return about 8% a year on average in the long run, compared to the stock market's 10% average return.

Another approach: Put enough of your savings into bonds to fund three to seven years of living expenses, and the rest into the stock market, according to Pope. That should give you a big enough bond portfolio to wait out any bear market, while also maximizing your portfolio's long-term growth potential.

"If the economy goes into recession, you'll have those assets to pull from," he says of investors' bond holdings.