Lately, turning on the financial news has been like opening a box with an unwanted surprise for investors. From the start of 2016, Wall Street has been shrouded in negativity, with doom and gloom predictions dominating the conversation.
It’s not hard to imagine why these bleak projections have had such a strong effect on investors, especially with 2008 in everyone’s recent memory. Veteran financial professionals can even find themselves succumbing to the overreactions and knee-jerk responses that dominate the conversation after a significant dip in the market.
But how can the market downturn really affect your investments?
Who’s the Most Affected?
The downturn can affect everyone, but current retirees may be the hardest hit by market volatility. CFP Scott Weiss of Weiss Financial Group said that everyone, especially seniors, needs to plan ahead for changes in the market. The trouble comes, he says, when retirees rely on these equities for their current living expenses, not realizing that prices may go down for a while. Instead of relying on equities for regular income, he suggests another method.
“If you are using the bucket approach where the money needed in the short term is in cash or cash equivalents and your future money is in equities, then the downturn in the market should have no bearing on your current lifestyle,” says Weiss.
Some retirees try to rely solely on guaranteed forms of income (pensions, social security, etc.) to be less dependent on current investments and insulate themselves from being hugely affected by dips in the market.
How to Shield Yourself Against Volatility
The farther away you are from retirement, the less you have to worry about the ups and downs of the market. But even millennials with a long investment horizon can take steps to protecting themselves against an economic disaster.
Kasey Ring, President of Upward Personal Finance, said there are three initial things investors can do to start minimizing their risk:
- The first is to diversify any assets. It’s unlikely that every sector will crash at once, so having money invested in a variety of industries will protect your portfolio. “Right now tech and energy sectors are getting hit,” she said. “If your portfolio has too many of these types of companies, I'm sure you're feeling it. But, if you’re correctly diversified, the pain is less severe.”
- Talking to a financial advisor is another way to help decrease risk. An advisor can diversify your portfolio or reassure you when a big company tanks. “Make sure your advisor is a firm believer in diversification and is skilled at rebalancing your portfolio when anything is too heavily weighted. The closer you are to retirement, the more critical this step is to your success.” Ring said.
- Consumers should also take advantage of low prices in the market and buy stocks when they drop. In that way, volatility could start seeming like a benefit instead of a reason to worry.
However, It may be uncomfortable to purchase stocks when the market talk is still so bleak. Another great option is for investors who haven’t yet contributed to an IRA for 2015, is to contribute now. Waiting, in this case, turned out to have major advantages, as stocks have fallen in the past year, making now an even better time to contribute to an IRA than early in 2015. There’s still time to contribute, but the April 18th 2016 deadline looms. Contribution limits for 2015 are $5,500 for investors under 50, and $6,500 for those 50-plus (this article details income limits and contribution rules).
The stock market is dynamic, and rough periods are part of the ride. The wisest investors know this and remain calm during the storms, while weighing the constructive actions they can take to improve their portfolios and protect their investments.
Zina Kumok is a writer for TraditionalIRA.com and Rot
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