The stock market has seen its fair share of volatility over the years, but 2020 has been a doozy. After closing out one of its worst quarters in history earlier this year, the market made a remarkable recovery and experienced record highs.
However, after the market took another dip over the long Labor Day weekend, some investors may be worried another crash is on the way. While nobody knows for sure whether (or when) a market crash will occur, there are a few steps you can take to protect your retirement savings as much as possible.
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1. Double-check your asset allocation
Asset allocation refers to how your investments are divvied up within your portfolio. Most investors have a mix of stocks and bonds, and how much you invest in stocks versus bonds will depend on your age and risk tolerance.
If you're nearing retirement age and are worried about your savings taking a hit during a market downturn, you may be better off investing more heavily in bonds. Although bonds generally experience lower rates of return than stocks, they're also less susceptible to market volatility.
It's important to find the right balance, however, because investing too conservatively can also be risky. If you invest only in bonds, it will be much more challenging to reach your retirement goals because your savings won't grow as quickly. One general rule of thumb to consider is the rule of 110, which states that your age subtracted from 110 is the percentage of your portfolio that should be allocated toward stocks. So if you're 50 years old, for instance, 60% of your portfolio should be allocated toward stocks, and 40% toward bonds.
2. Keep investing consistently
It can be tempting to stop investing for the time being if you're worried a market crash is on the horizon, but in many cases pressing pause on saving could potentially do more harm than good.
The stock market is unpredictable, so even though it has experienced a slight downturn over the last week, that doesn't necessarily mean a devastating crash is on the way. And if you stop investing now, you could miss out on potential growth.
In addition, the stock market has always been able to recover from even the worst crashes over the years, so it's extremely likely it will recover from the next one, too. Despite seeing serious downturns in 2008 and earlier in 2020, the market bounced back stronger than ever. By continuing to invest consistently no matter what the market does, you'll reap the rewards when it inevitably recovers.
3. Build up your emergency fund
If you don't already have a robust emergency fund, now is the time to build one. Even if your job is secure and you don't expect to experience any major financial challenges in the relatively near future, you never know when an unexpected expense may pop up. And if that happens, the last thing you want is to have to pull your money out of the stock market during a downturn.
During a market crash, stock prices may drop substantially. If you withdraw your savings from your retirement fund when stock prices are lower, you'll be selling your investments when they're less valuable -- and you may end up losing money.
By stashing at least three to six months' worth of savings in an emergency fund, you can leave your retirement investments untouched if the market does crash, which will help them recover faster.
Nobody can say for sure what will happen with the stock market in the near future, but it's wise to be prepared for a downturn just in case. By taking these three steps, you can limit your risk and keep your retirement savings as safe as possible.
