How to manage your retirement account in a bear market

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Stocks are in a bear market, inflation is at a 40-year high and economists are warning about a possible recession on the horizon. Millions of Americans are trying to save for retirement and the economic turmoil has raised big questions. Should they sell their investments or continue to save?

First, don’t panic, experts say — that can lead to hasty financial decisions that you might regret later. When you’re looking at the market, it’s important to keep your eyes on your financial goals.

The S&P 500 is down more than 21% since its most recent peak in January, which means it has entered a bear market — when stocks fall at least 20% from their previous peak. This is a common occurrence. The last one occurred two years ago, when the U.S. was hit by a pandemic. Younger investors who have not experienced such a decline or older investors closer to retirement might be tempted by this temptation to bail out or change strategies.

“Riding through market downturns can be a good rule-of-thumb,” Amy Richardson, certified financial planner with Schwab Intelligent Portfolios Premium told CBS MoneyWatch. It’s almost impossible to predict the markets. Therefore, it’s important that you have a strategy and are clear about your financial goals. “

Having a financial plan “can help you ignore the day-to-day market noise,” she added.

Don’t try to time the market

There’s a reason why you may have heard this many times: Investment professionals show that timing the market — or trying to guess when stocks are at their top or bottom — is nearly impossible. Research shows that those who sell stocks in a downturn are more likely to lose out on the opportunities for long-term returns.

For instance, one study published by the investment organization CAIA found that a buy-and-hold investor would have an annual return of almost 10% from 1961 to 2015. But an investor who tried to time the market and missed the 25 best days during that period would have an annual return of less than 6%.

To be sure, if an investor managed to avoid the worst 25 days during that period, their annualized return would have been more than 15%. It is not easy to predict the worst and the best days in the market. Investment pros recommend that you stick with the “buy-and-hold” strategy.

Should I move into cash?

Only if you need the money immediately or want to lock in losses, experts say. Richardson acknowledges that it can be tempting to turn to cash for defensive purposes, but cash’s purchasing power is affected by high inflation.

While Federal Reserve interest rate hikes provide better returns for savings accounts and certificates-of-deposit (CDs), they still trail the rate of inflation. According to Ken Tumin, DepositAccounts.com, a 1-year CD now yields a monthly return of 1.5%. This is up from 0.7% in March. But in May, inflation jumped to 8.6%, which means that cash invested in a CD would see its buying power eroded by about 7%.

That might still seem more appetizing than the steep investment losses incurred during a bear market, but you won’t have the chance to make up those losses as you would in the market during periods when stocks rise. Richardson said that it is a good idea to limit your cash exposure during high inflation periods.

“While it may not seem like it when the markets are falling, stocks have traditionally outpaced inflation over time,” she said.

Should I stop contributing to my 401(k)?

Research has shown that consistent investing pays off over time. For instance, Charles Schwab looked at five different investing styles, ranging from trying to time the market to keeping everything in cash. The investor who was able to accurately time the market was the best performer, which is impossible for most investors.

After that, the best strategy was one in which an investor put aside money at the beginning of the year and followed by a method called “dollar cost averaging,” where they invest a fixed amount each month or with each paycheck. In other words, how most people invest in their 401(k)s.

The worst performer? Schwab discovered that the best performer was the one who stayed with cash. Richardson stated that he believes that time in market is more important that timing the market. That means that any time you have money to invest is a good moment. “If you have the ability to put more toward your 401(k) or other retirement accounts, this is as good a time as any. “

Should my asset allocation be changed?

This could be a good time to talk with your financial adviser about your goals and to check whether your portfolio aligns with those objectives, experts say. This could lead to an asset allocation shift, if you wish to reduce your equity exposure or reduce your investments in certain sectors like tech.

” For most investors, broad diversification is the best way to achieve long-term success. It should be compatible with their risk tolerance. Richardson stated. You diversify your portfolio by spreading your money across different assets. This allows you to understand that all investments will fluctuate depending on different factors. “

People who are close to retirement or already retired may want to add Treasury Inflation-Protected Securities, or TIPS, to their portfolio, she added. Investors can buy TIPS directly through the Treasury Department, or via their bank or broker. But an investor can only buy $10,000 worth of TIPS annually for each account, which limits the amount of inflation protection they can offer.

“Commodities are also a good offset to inflation,” Richardson added.

How long does a bear market last?

Since World War II, bear markets on average have taken 13 months to go from peak to trough and 27 months to return to breakeven. The S&P 500 index plunged an average of 33% during bear markets in that period. The biggest decline occurred in the 2007-2009 slump, when the S&P 500 fell 57%.

Bear markets tend to have three stages, according to Bank of America technical research strategist Stephen Suttmeier, who cited Wall Street legend Bob Farrell’s “10 Market Rules to Remember” for investors anxious about the market downturn. The first stage is a sharp decline followed by a rebound and then a “drawn out fundamental downtrend,” he said.

“We are likely in the third stage, with risk to 3800 (20% correction) and even 3500 (27%) on the S&P 500,” Suttmeier said in a research note.


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That means the stock market may not have hit bottom, with the S&P 500 trading at about 3,760 on Monday. But even if markets continue fading, investors should focus on valuations, given that the price-to-earnings ratio on the S&P 500 is now below its 25-year average, advised David Kelly, chief global strategist at JPMorgan Funds.

“Whatever short-term cyclical journey the economy takes from here, it should, within a few years, resume a brighter path of moderate growth, low inflation and high profitability,” Kelly said in a report.

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