"Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." -- Peter Lynch
BY JULIA ANDERSON
Investors who remained in the U.S. stock market after the Covid 19 selloff in March 2020 can be happy, maybe proud of their ride-it-out strategy. Markets more than doubled since a quick 30 percent downturn before making one of the fastest recoveries in history.
Now here in the fall of 2021, investors can celebrate another 20 percent to the upside thanks to rock bottom interest rates, economic stimulus packages including cash pumped into jobless benefits and strong consumer demand for goods and services.
Can this go on? Can markets climb higher?
Headwinds are gathering but traders show no signs of abandoning ship. Analysts with a longer-term outlook expect market growth to slow from what we have experienced in the past 18 months. But no one is saying we are headed for a crash.
But at some point, there must be a correction. It could be triggered by a bump up in interest rates from the Federal Reserve Bank, a return of Covid lockdowns that pushes jobless rates up, continued supply chain choke points that stifle GDP growth or some catastrophe that we’ve not thought of.
That’s why I have devised a plan to protect my portfolio in case of a downturn as the Federal Reserve begins to look at raising rates, as stimulus money dries up and we get a little more back to normal, whatever that might be. We are getting back to normal, right?
Here’s the challenge: How do you prepare for a downturn while continuing to earn dividends and build your nest egg? This largely depends on your age.
Let’s start with those fully retired, those in early retirement and those at 60 near retirement:
Over 60? In the decade of your 60s, things change. You may retire, you may lose a spouse. You may sell your house and move. Likely you will continue to work part-time, but you may start claiming Social Security benefits and/or drawing money out of your retirement tax-deferred nest egg.
Making these moves requires planning. How will you keep growing your nest egg as you make these transitions? The stock market is still your friend offering the best returns over time.
Plenty of spread sheets will show you income curves related to types of investments – stocks, bonds, money market accounts or some combination. Don’t get too conservative. Don’t sit on the sidelines because you are afraid of seeing your nest egg lose value. Your money must keep earning money. Keep most in stocks paying dividends inside your tax-deferred account but have enough in cash so you can sleep at night if there’s sell off.
In your 70s, the IRS will require you to begin withdrawing money from your tax-deferred portfolio. These Required Minimum Distributions or RMDs will be taxed as ordinary income.
Here’s a strategy to anticipate an economic slowdown. Convert enough of your nest egg to cash to cover the Required Minimum Withdrawals for the next 18 to 24 months. Leave the rest in dividend paying stocks. That way, if there’s a sellout, you don’t have to sell anything at a discount. Meanwhile, your quarterly dividend money gets reinvested in more shares of the stocks or mutual funds that you own.
Now for the younger crowd:
If you are age 18 to 30, just keep chucking money into your 401(k) at work or an Individual Retirement Account, Roth IRA or all three. Don’t be bothered by a sell off. All that means is that U.S. stocks are on sale. Your long-term investment money will buy more shares in a mutual fund or individual dividend-paying stock than when markets were up. Count on an average 100-year stock market return of 8 to 10 percent a year. You are a long way from retirement. You will get where you need to go if you stick with the plan.
If you are 30 to 50 years old, do the same as the above-mentioned younger group. The money you are putting into retirement savings is not going anywhere. Make sure that your retirement money is not emergency money. You have that money stashed somewhere else. This is not money squirreled away for the next vacation or to buy a new house.
If interest rates go up, consider putting new cash into a money market fund at 2 percent or more outside of a deferred plan. You want to stay ahead of inflation with long-term investments. Inflation can bite. Saving is important but earning money on your savings is more important.
At 50, retirement begins to loom. Are you on track to have a big enough nest egg at age 65, 70 to live on? You may face an early buyout or a layoff. Do you still want to be in the stock market? Yes, if you are job-secure and can count on working until your mid-60s. If there are clouds on the horizon, you may need to make an early withdrawal from a deferred account. Then some of it should be in cash so you don’t sell during a market sell-off. Withdrawing money from an IRA or 401(k) should be the very last thing you do. There are penalties for that.
Meanwhile, build an emergency outside your deferred accounts with enough cash to pay your bills for a year. That way you can stay in the market with your retirement money through the ups and downs without having to sell something when markets or a stock is down.
Remember: Fear and greed drive markets. Many investors can’t stand the heat of a selloff. They bailout at or near the bottom of a market downturn and then fail to get back in time to take advantage of the eventual turnaround. Investors, especially women, “need help in developing emotional discipline,” says national financial columnist Chuck Jaffee. I agree. But how to do that?
Think about your MONEY PLAN in advance. Remain confident that doing nothing, staying the course IS A PLAN! If markets crater it is NOT the end of the world, the value of your portfolio will recover. History proves it. Have a talk with yourself in advance about how to handle a sell-off.
After a breath-taking 30 percent Covid induced decline in March 2020, the recovery began almost immediately. A year later, the Dow Jones was up 80 percent from 12 months earlier and has been hitting fresh new highs all summer. My sympathies to those investors who bailed out and are now on the sidelines wondering what to do.
What’s ahead? Most experts predict that a sell off is coming after the spectacular 2021 ride to record stock market values. On the plus side, the Fed will likely keep interest rates low in the face of the Delta covid variant. That keeps money in stock markets. The U.S. economy is in better shape that most of the rest of the world. The nation’s labor market is adding jobs. Consumers are consuming. All these indicators point to further increases in stock values if corporate earnings stay positive. Passage of a federal Transportation Bill will help.
On the negative (selloff side) markets may be “over-bought” and need a breather. A slight increase in interest rates could trigger market declines. There could be another unexpected disaster… covid variant, terrorist attack, weather-related difficulty. Supply systems could remain stuck. Computer chip shortages could mean trouble for manufacturers. Unemployment could remain elevated with slowing job recovery. And there’s a certain taste for speculation in markets with the crypto craze, high flying tech stocks and speculative Ponzi-like pressures that are putting younger investors at big risk.
There’s a lot to ponder, to worry about. Don’t ignore these worries, analyze them, and have a plan. Remember: The average annualized rate of return for U.S. stock markets is about 8-10 percent. Embrace that fact but keep some cash on the side.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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