How to Handle Retirement Funds

A woman seeks advice about the best way to handle retirement funds during the stock market crash.

It’s Your Money, Honey

Stock Market: Should I Stay or Should I Go Now?

Dear Money Expert: OK, the stock market has just hit a new low. What’s your advice for retirement funds (retirement 10-15 years away)? Sell now? Stay the course? Scream?

Money Expert: Any financial advice on the stock market should be taken with a few grains of salt. You should always use your best judgment. Stock prices have a tendency to fluctuate suddenly so it isn’t always wise to invest in the new “stock of the week.” It can be difficult to know what to do during times like this since you are getting information thrown your way from thousands of experts. I would like to share my seven secrets of investing in a volatile market:

Secret #1 – Market Downturns are Natural and Inevitable

Don’t panic! Fluctuations in the market are a natural part of the
economic cycle. If you are invested for the long-term you shouldn’t worry about normal price cycles. This doesn’t mean keeping stocks in a company that is about to go under.

The best advice is to make minor adjustments to your portfolio and wait it out. The stock market tends to recover almost as quickly as it drops. Cashing out your investments would only be reasonable if your time horizon is short-term and you are in need of the money now.

Secret #2 – Keeping Your Portfolio in Check

It might currently seem easier to cash out and go home, but before you do that you may want to consider your long-term goals for that money.

Will you still be able to accomplish your goals if you get out of the market now? Even though you may suffer some losses in the short-term, in the long run you will be better off if you stay in the market.

Your risk tolerance, as an investor, is the amount of money that you are comfortable with losing. Risk tolerance usually depends on the investor’s age, current income, time horizon and goals. For instance, an 80 year-old retired widow will have a much lower tolerance for risk than a single 35 year-old doctor who has twice the amount of time to rebuild their wealth.

To find out what type of investor you are, click here!

Secret #3 – The Market Timing Myth

Market timing is when investors try to predict the direction of the market. Active trading is proven to result in much lower overall returns, mainly due to the taxes and fees associated with frequently buying and selling securities.

Trying to time the market is not fool-proof or even practical. Market timers have a hard task. They have to accurately predict when to get out of the market as well as when to get back in.

The length of time you are in the market can have a big impact on your portfolio. Don’t wait around for the “perfect” time to buy, because you may miss your real opportunity. Trying to time market fluctuations is a near impossible task. A sound strategy usually involves sustaining a long-term horizon.

Secret #4 – Focus on Quality

Instead of selling all your invested assets, it might be better to reduce certain areas and to look for higher quality stocks and bonds.

For bonds, look at the rating symbols for Standard and Poor’s and
Moody’s issue. “AAA” is the highest quality credit rating, and C or D is the lowest credit rating depending on the agency.

For mutual funds, one method for quality control is to look at the manager tenure length. It is a good idea to steer clear of mangers that do not have a lot of experience. Try to look for managers with at least 5 years of experience. That way you know that they have actually been through a market downturn. Also, managers that have a longer tenure period tend to be more consistent in their investing strategies.

You can find information about your fund manager by searching for the fund here.

Secret #5 – Diversify, Diversify, and Diversify

This is not really a secret. In fact, it is common financial advice. Not putting all your eggs in one basket is especially important right now.
Always remember the rules of thumb for basic investing!

There are some small changes that you can make within your portfolio to help diversify your portfolio right now. In a more volatile market large companies with a small amount of debt have a better chance of withstanding the market downturns as opposed to smaller companies.

Another thing you can do is to increase the percentage of your stocks that are invested in global and international markets. This will help maintain a balance when the US economy is going through a rough period.

Don’t forget to make sure your portfolio stays well within your risk tolerance level. After all, you want to be able to sleep comfortably at night!

Secret #6 – Dollar Cost Averaging

Dollar cost averaging is a type of investing strategy that reduces your exposure to the risk of making a large lump-sum purchase for your portfolio. It works by spreading out your purchases over an extended period of time.

The idea is to spend a fixed dollar amount each month or quarter on a specific investment or part of a portfolio regardless of the share price. This means that you will purchase more shares when prices are low and less shares when prices are high.

For example, if you decide to spend $500 each month on purchasing shares you will only be able to buy a few shares if the price is $100 per/share. However, if the price goes down to $50 the next month you will be able to buy twice as many shares.

By making smaller purchases over a longer period of time, your cost
basis or the amount you pay for a security is spread out providing a
cushion against normal market price fluctuations.

Secret #7 – Find the Right Financial Advisor For You!

There are several different types of financial advisors that are available to you. A good advisor will help you to meet your life-long goals.

You should be skeptical of advisors that make unrealistic promises to “beat the market” and to provide you with “above average” returns. These types of promises are a ploy used to get your business.

Knowing your planner’s exact job title may help you tell whether he or she is a fiduciary. A “fiduciary” is a professional who is 100 percent committed to putting your financial interests ahead of their own. Stock brokers (also known as “registered representatives”) or insurance agents are allowed to put their own interests, or those of their firm, ahead of yours.

Independent, fee-only financial advisors provide customized advisory services for a flat fee, an hourly rate, or a percentage of the assets being managed. This method of compensation means the advisor gets paid for providing professional advice on reaching your goals, not for activity in your account.

Full-commission brokers, on the other hand charge commissions or sales fees based on trading activity or product sales. Financial plans and investment recommendations from full-commission brokers are often product driven, raising conflict of interest issues.

Choosing the right financial advisor may be one of the most important
decisions that you make for yourself and your family. Take the time to find someone who you are comfortable around and can trust.

Wishing you prosperity and happiness,
Stacy Francis, Betty’s Money Expert

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