When bull turns to bear, should you change your asset allocation? It might depend on where you are in your investment journey. If you’re thinking about a strategy pivot, here are a few things to consider.
Selling all portfolio holdings is potentially the biggest mistake any investor can make
The last thing you want to experience as you sail toward retirement is a storm of volatility. Will it be a correction, a bear market, or a really bad recession? You can’t always tell. But whether retirement is decades away or just around the corner, it’s a good idea to review your retirement strategy for this scenario, just in case.
When volatility strikes and the economic outlook seems uncertain, the question that many investors tend to ask themselves is, “Should I rebalance my retirement portfolio or just ride it out?”
Well, it depends on a few different factors. According to Viraj Desai, senior manager, portfolio construction at TD Ameritrade Investment Management, LLC,* yourtime to retirement is a key element in the asset allocation decision.
Here are a couple of time-based scenarios to help you decide when and how to pivot your retirement strategy.
If you’re decades away from retiring, then you may be in a position to be more aggressive with your retirement portfolio. Depending on your risk tolerance, this might mean having your asset allocation tilt in favor of stocks over bonds or other assets.
The potential upside to turbulence, however, can be quite significant—via what’s known as risk premium —essentially an added compensation or enticement to investors for accepting higher risks. Time horizon should be carefully considered to determine if additional risk is commensurate with expected returns.
As Desai pointed out, “history has shown that, yes, you’ll experience higher levels of volatility during recessionary conditions, but some have said they also present potential opportunities to accumulate assets.”
Hitting the sell button and sitting in cash, according to Desai, is “perhaps the worst thing you can possibly do.” When investors dump everything or close to it, they’re typically trying to time the market. And that could be the biggest blunder an investor can make, as people typically miss the best re-entry points and some of the best performance days by trying to time things.
Rebalancing isn’t about market timing. “It’s about buying low and selling high in a disciplined manner,” Desai explained.
In other words, it’s about locking in relative performance (things that have done quite well) and buying assets that have been hit the hardest. The “selling” part is only half the equation. As Desai suggested, “things that have been hit the hardest could come back the strongest.”
Thinking about rebalancing a 401(k) or other retirement account? Ultimately, your goal in rebalancing is to capture asset performance over time, not to capture the next big thing.
Suppose you’re just months away from retiring and the economic winds seem cold and gloomy. The stock market is tumbling, your portfolio value is sinking, and it looks like the recessionary storm is about to begin. What now?
In this scenario, your retirement investing strategy is likely to be conservative. You’re probably in need of liquidity, because you’ll need some cash flow, and you’re probably looking to preserve capital.
First, figure out how much cash flow you need for the entire year. Second, ask yourself if you have the capacity to wait a year or two to recoup your portfolio losses. Finally, try to figure out if you can tap into your portfolio for cash flow without depleting it altogether.
If you can do all of the above, then you may be in a good spot—generating cash flow from your portfolio and allowing your portfolio to capture the upside once the market turns around.
Get access to tools to help you with retirement planning.
Just because you’ve chosen a date for retirement doesn’t mean your retirement has to begin right then. If you absolutely need to postpone your retirement—at least until you’ve recouped your market losses—then do so. If you need to pick up some extra income, you might want to consider a side gig.
Creating additional cash flow to cover your living expenses and, if possible, to invest while the stock market is down can be a powerful way to preserve your current asset allocation and potentially increase your retirement savings.
Are you receiving a pension, Social Security benefits, annuity payouts, sizable fixed-income payments, or rental income (if you own investment properties)? If so, and if you can dollar-cost average in the meantime, you may come out on the other end of the tunnel with more than you had coming into it.
A quick note on bonds and other fixed-income securities: If you’re already invested in debt securities, you might want to consider diversifying even more. “Other ways to diversify your portfolio—depending on your appetite for risk—include small amounts of the high-yield market, foreign bonds, emerging market debt, and, as counterintuitive as it seems, allocating a small percentage of your portfolio to high-dividend equities, as these have different correlations to bonds, potentially making your portfolio more efficient,” said Desai.
Whenever a potential recession appears on the horizon, almost every investor will think twice about their retirement strategy and portfolio allocation. “Should I hold steady or mix it up a bit?” Depending on how long you have left before retirement, rebalancing your portfolio can help. Just remember that rebalancing is about buying low and selling high in a disciplined manner. It’s not about dumping everything, sitting in cash, and timing the market.
Selling everything can be a big mistake when the market goes down, as you may miss an opportunity to rebalance and build your portfolio. If you need to sell assets for liquidity, many investors try to take only what they need. Last but not least, remember that the assets hit the hardest may have the potential to rise the most when the economy turns around.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
*Advisory services are provided by TD Ameritrade Investment Management, LLC (“TD Ameritrade Investment Management”), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (ADV Part 2).
All investments involve risk, including loss of principal. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing.
Asset allocation and diversification do not eliminate the risk of experiencing investment losses.
Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.
Dollar cost averaging does not assure a profit and does not protect against loss in declining markets.
Dollar cost averaging plans involves continuous investment in securities regardless of fluctuating price levels of such securities. Investors utilizing a dollar cost averaging plan should consider his or her financial ability to continue to purchasing additional securities through periods of low price levels.
Those who practice frequent dollar cost averaging and active traders may generate trading costs that outweigh any cost benefit.
Payment of stock dividends is not guaranteed and dividends may be discontinued. The underlying common stock is subject to market and business risks including insolvency.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.