As I write this the Dow Jones Industrial Average has surpassed the 20,000-milestone intraday today. This comes some seven months after a 610 point drop in the Dow in the wake of the Brexit, the vote taken in U.K. where they decided to leave the European Union.
Over the past 16 + 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 both 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 and we are approaching the eighth year of this bull market. 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 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 losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.
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If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done.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 this is a good time to revisit your asset allocation and perhaps reduce your overall risk.
Learn from the past
It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still 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 it 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 retirement goals, your time horizon and your risk tolerance.
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Photo credit: Phillip Taylor PT