It seems that every time I turn on a financial report, someone’s warning that the bull market we’ve been enjoying for more than eight years is about to come crashing down. Some analysts point to signs such as the rising price of gold, decreased trading volume, and muted reaction to strong earnings reports as harbingers of a crash.
Others just point to the calendar: Since 1926, the average bull market has lasted nine years, and ours by most measures is about eight and a half years old. (See also: Are We Headed Toward a Bull or Bear Market?)While there is some truth to the notion that no party lasts forever, there is also no definitive way to predict when we might see a correction (a 10 percent decline) or a crash (a 20 percent or greater drop). So before we get into the nuts and bolts of market disaster preparedness, understand this: No matter how nervous people feel, a correction may not happen this year or even next. This is really important to know, because if you make drastic changes to your portfolio to protect it from stock declines, you may well miss out on months or even years of growth that you can never get back.
Does that mean you should plunge your head into the sand and do nothing, no matter how worried you feel about a possible market crash? No. There are steps you can take that would both set your mind at ease and help prepare your finances for whatever the market brings. (See also: Want Your Investments to Do Better? Stop Watching the News)
Take stock
Harness the energy of your market jitters to perform some portfolio hygiene that you should have been doing all along. If you’ve been carrying too much risk without even realizing it, now’s the time to adjust that.
“Figure out what your allocation is between equities (stocks) and fixed income (bonds and cash),” recommends investment adviser Bob Goldman. “A lot of people will find they had a higher concentration of equities than they thought they did, because equities, especially U.S. equities, have done so well in the past few years.”
How do you know if you’re carrying the right amount of risk? It’s all about your goals and your timeline. Riskier portfolios generally have a higher percentage of stocks and a lower percentage of bonds and cash. If you need your money to grow to meet your goals, you’ll have to take on some risk to get there. If you’re not sure how much risk you should take on, consider investing in a target date index fund, where you input when you need the money, and the fund manager does the rest.
If your portfolio is considered appropriate for your timeline but you just can’t sleep at night, it’s OK to dial back the risk to give yourself peace of mind — as long as you can afford to. Use an online investment calculator, consult portfolio allocation models, or talk to an adviser to figure out if you could reduce your stock allocation by 10 percent and still have enough money to retire when you want to. If you’ll still have enough, then go ahead. (See also: 5 Essentials for Building a Profitable Portfolio)
Keep investing
If you have been contributing money from each paycheck to your 401(k) or buying stocks in a taxable account, don’t stop just because you’re worried the market may be peaking. Remember that if a bear market happens, it won’t last forever. In fact, bear markets are almost always shorter than bull markets, with an average decline and recovery of just three years.
You may be tempted to slow down your investment schedule, dividing your money into periodic investments instead of buying stocks and bonds in one lump sum. This would save you some losses if a crash really does come during the year, but this approach, known as dollar cost averaging, usually doesn’t pay off since timing the markets is typically considered futile.
So what if…
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