Stock market volatility is by no means a new concept, but over the past eight months, investors have seen their fair share of it. In March, when news of the coronavirus pandemic broke, stock values plummeted, sending investors into their first bear market in over a decade. And while stocks recovered nicely after the fact, the market saw a major sell-off in early September, and a host of turbulence in October as the presidential election neared.
But while 2020 may read like a particularly volatile year, it's certainly not the first period during which the stock market has had its share of ups and downs, and as an investor, it's crucial that you take steps to protect yourself from extended periods of market decline. This especially holds true if you're nearing retirement, because if you're forced to tap your 401(k) or IRA when your portfolio value is down, you'll risk locking in permanent losses that hurt you throughout retirement.
Unfortunately, only 39% of Americans consider their investments to be well-protected from stock market downturns and volatility, according to a recent TIAA survey. If you're part of that statistic, then it's time to make changes to your portfolio -- before it's too late.
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Preventing losses
The right asset allocation in your investment portfolio could spare you a world of financial pain if the stock market takes a tumble. To be clear, your portfolio should look very different in your 30s and 40s than it should in your 60s and beyond. When you're younger, you should go heavy on stocks, all the while making sure to have at least six months' worth of living expenses in cash on hand for emergencies. That way, you won't have to sell stocks at a loss to cover unplanned bills.
Once you get older, however, you'll need to start shifting away from stocks and loading up on bonds, which not only pay interest twice a year for guaranteed income, but are also far less subject to drastic fluctuations in value than stocks.
What percentage of your portfolio should bonds entail as retirement nears? The specific number will depend on your personal appetite for risk and what other assets or income streams you have at your disposal. But as a general rule, if you're in your 60s, you may want to aim for a 50/50 stock-bond split. That way, if stocks crash, you'll still have a decent percentage of your portfolio in bonds that you can tap to pay your living expenses.
Of course, at that stage of life, you'll also want to make sure you have at least a year's worth of living expenses in cash, whether in your retirement plan or a regular savings account. You may also want to line up a backup income source, like a home equity line of credit, in case your investments really take a hit as you're about to retire or during retirement itself.
If you're not sure how well your portfolio is protected from stock market volatility, spend now time reviewing it now. Currently, the stock market is in good shape, so if you need to make some changes, you're better off taking action sooner rather than later. Volatility is pretty much a mainstay of stock investing, and it's not something you have to fear -- provided you set up your portfolio in a way to prevent losses when the market goes wild.
