Over the past 13 years we’ve seen two market peaks followed by pronounced market drops. The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002. The Dot Com Bubble and the tragedy of September 11 all contributed. The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis. Since then the market has rallied with the S&P closing at a record 1632 on May 9, 2013. As someone saving for retirement what should you do at this point?
Review and rebalance
During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The recent PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.
However, some of the folks who experienced these drops well in excess of the markets were victims of their own over allocation to stocks. This might have been their doing or the result of poor financial advice.
Regardless we are in the midst of a four year rally off of the 2009 lows and the past year’s gains have been especially torrid . This is the time to review your portfolio allocation and rebalance if needed. For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more. This is great as long as the market continues to rise, but you at increased risk should the market head down. It may be time to consider paring equities back and to implement a strategy for doing this.
Financial Planning is vital
If you don’t have a financial plan in place or if the last one you’ve done is old and outdated this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.
If you have a financial plan this is a great time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so maybe this is a good time to revisit your asset allocation and perhaps reduce your overall risk.
Learn from the past
John Hancock has been running a commercial that shows nicely dressed middle-aged couples in their financial advisor’s office saying that maybe this is the time to get back into the market. As an advisor these commercials are nauseating to me.
It is said that fear and greed are the two main drivers of the stock market. The talking suits on shows like CNBC seem to feel that the market has a ways to run and might even be undervalued. Maybe they’re right. However don’t get carried away and let greed guide your decisions.
Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What is does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your long-term goals and risk tolerance.
Please feel free to contact me with your financial planning and investing questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.
For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.
Photo credit: Phillip Taylor PT