About eight years ago with the market diving to rock bottom, it finally began to rebound showing steady growth, and as you may already know, stock prices and annual returns both, have begun to skyrocket.
Unfortunately, like everything else, these spectacular numbers won’t last forever and to make matters even more dismal, many seasoned investment pros have nothing but pessimistic predictions for the future.
The asset management company, BlackRock, for example, claims in its quarterly outlook report that U.S. stocks are expected to gain at an annual rate of 5.9% over the next ten years — this compared to the estimated 12% return investors were getting in 2016.
Of course, seeing the stock market bounce up and down like a roller coaster is not unusual, but today there’s a foreseeable problem. According to a survey done by BlackRock, 66% of optimistic investors firmly believe future gains will approach the same returns they’ve been seeing in recent years. Seventeen percent believe they’ll go even higher.
Going beyond that, many of today’s investors continue to hold a certain number of flawed assumptions about the amount of money they’re actually going to need in order to be able to retire in a reasonable amount of comfort. Fifty-six percent of investors queried believe they’re going to have enough retirement, 65% admit they were completely unaware of the far lower percentage of expected returns than they’ve been seeing.
In any case, as an investor, hoping to have your “nest egg” not only in good hands, but meeting your retirement needs and expectations, what can you do to protect yourself in the dreadful event that the market crashes?
Check to ensure that your investment portfolio is aligned with your risk tolerance
Many, facing the idea of a crash, put all their money in high-risk high-reward stocks in the hope that they can make some quick money and stay ahead of the game while the money is still there. You certainly already know that volatile stocks are always extremely risky — in particular for the older investor who can’t afford to lose very much. Add to that danger, the fact that the market as a whole is expected to drop during the upcoming years, your high-risk investments become even riskier.
A talk with your financial adviser can help you determine just how much risk you’ll be comfortable with. That decision being made, he/she will be able to help you home in on the investments that are right for your current and future profit combined with safety. All this, of course, based on market performance predictions.
Don’t invest money you expect to need during the next five years
Financial advisors have always offered this good piece of advice to investors. Having to pull your money out of the market for emergencies or other expenses, has always been a bad idea. But this is even more important during a downturn in the market. The old saw, what goes up must come down, holds true in the marketplace too, but during a downturn in the market, it’s even truer and can be chilling.
During a market downturn or crash, you should be prepared to ride out the storm rather than having to panic and sell off everything you have. When you invest only money you know you won’t need for at least five years it will be much easier for you to ride it out without touching your savings, taking comfort in the knowledge that eventually, the market will recover.
Debt. Bad idea. Eliminate all the debt possible
If you’re one of those who, nearing retirement, realize your savings aren’t what you had hoped, you may reach out in desperation for ways to continue with your accustomed lifestyle. Unfortunately, there’s only one real “fix” for this problem and that is to cinch up your belt and put yourself on a strict budget. This may mean cutting all the costs possible.
The last expense you’ll need or want is to have a huge load of debt looming over your head. Easy loans, easy credit cards, easy refinance on your home — all these can be tempting to a person who is looking for a way to “keep up appearances”. But debt in these circumstances is a bad idea.
If the market should take a downward spiral, you want to salvage every penny you can. But if your income or much of it is going out to pay off mortgages, loans and/or credit card debt, it’s obvious that you’re not in a very desirable position.
This may give rise to the question of whether you should put your cash savings toward paying down your debt or invest it into your savings fund. Unfortunately, there’s no short or easy answer, but generally speaking, it’s usually better to pay off your highest-interest debt — usually credit card debt — rather than trying to invest it while this debt load still lingers.
To recap: the money you invest today should always be money you can live without for at least five years. Therefore, it makes sense to pay down as much debt as possible so you can rest in the assurance that you won’t have to pull your money out of the market if an unexpected financial problem pops up.
Prepare for the worst
Of course, it’s impossible for anyone to prepare a completely foolproof investment strategy for the event of a market crash, but you can do something. While not really a pleasant thought, your strategy here is to prepare for the worst. Always.
As an example, if you assume that your portfolio will be cut in half in just a few years, you’ll want to work harder to ensure you’ll have enough in savings to stand up to a hit such as that, and in addition this will help you avoid going into panic, a state in which poor decisions run rampant. When there is a market crash, you have to be prepared to think strategically.
Naturally, no one likes to think about stock market crashes, but being realistic, we have to remember that good times simply don’t last forever. That old Boy Scout motto: “Be prepared” is just as true in the marketplace as it is at the scout campground.
Be prepared ahead of time by keeping a close eye on your savings, investing wisely and carefully, and being prepared for a worst-case possibility, and you should be in a good position to ride out the storm.