It's been a rough few weeks for the stock market, as prices slide and economic uncertainty continues. Since early September, the S&P 500 has fallen by around 5%. The Dow Jones Industrial Average is down roughly 3.8% in that time period, and the Nasdaq has dropped by more than 7%.
There are many reasons stock prices may be slipping, including supply chain challenges, increasing COVID-19 cases, and labor shortages across the country. While some investors believe a market crash could be looming, it's uncertain what the future holds for the stock market.
Whether a crash is coming or not, it's a good idea to consider how market volatility can affect your financial future -- especially if you're nearing retirement age. Whether you're already retired or plan to retire in the relatively near future, here's how a market crash could affect your savings.
The key to protecting your savings from a crash
How badly your retirement savings will be hit if the market crashes depends largely on your asset allocation, which is how your investments are divided within your portfolio.
Younger investors generally allocate more of their portfolios toward stocks, because stocks tend to see much higher rates of returns than bonds and other conservative investments. A portfolio that's heavily invested in stocks will be hit harder if the market crashes, but younger investors have decades to let their money recover.
As you get older, it's wise to adjust your asset allocation to be more conservative. If you're close to retirement and, say, 90% of your portfolio is made up of stocks, a market downturn might wreak havoc on your savings. That could spell disaster when you're depending on those savings to make ends meet in retirement.
There's no hard-and-fast rule when it comes to how much of your portfolio should be in stocks versus bonds. However, a general guideline is to subtract your age from 110. The result is the percentage of your portfolio that should be invested in stocks. That means if you're, say, 65 years old, you should have around 45% of your portfolio in stocks and 55% in bonds.
Is it still safe to invest in stocks right now?
Regardless of your age, it's still wise to have at least some money in stocks. While stocks can be riskier than bonds, they also help your savings grow much faster.
Even after you retire, you'll still want your savings to continue growing throughout your senior years. By investing at least a small portion of your portfolio in stocks and allocating the rest toward more conservative investments like bonds, you can maximize your earnings while minimizing your risk.
It's also important to continue investing in the stock market even during periods of volatility. It can be tempting to pull all your money out of the market (especially if you're nearing retirement), but that can be a dangerous move. If you sell at the wrong time when prices are lower, you could lose money and lock in your losses.
The stock market can be intimidating, especially if you're worried about losing your retirement savings. The good news, though, is that by double-checking your asset allocation, you can protect your money as much as possible.