In the wake of> this week s market correction not to mention the recent flash crash some retirees are revisiting their portfolios. I ve had a couple of people say I ve had it, says June Walbert, a financial planner at USAA in San Antonio.
But is it the right time to flee the stock market? Not necessarily. Not only are stocks generally a helpful tool for outpacing inflation, but in down times buying opportunities typically abound.
Here are five tips for measuring your risk tolerance and adjusting your investments.
Check your gut
No one knows how the market will perform in the next year -- let alone 10 years from now. However, if you can t sleep at night, there s a good chance you re taking too many risks, says Walbert. Although you should avoid making any rash, emotion-driven moves with your investments, consider mildly reducing your exposure to riskier investments like stocks, she says. Over time, you don t give up much by putting a little more into conservative investments, Walbert says. Plus, it is psychologically pleasing Making emotional decisions to get in and out of the market is the wrong thing to do. Just make sure you re not forgetting your long-term retirement planning goals, she says.
Rebalance your investments
Depending on your target asset allocation -- for example, someone in their 20s or 30s may have 80% of their retirement savings invested in stock funds and 20% in fixed income -- a big dip in the stock market may have thrown your asset-allocation mix out of whack. If so, you actually may need to divert more funds from fixed-income investments into equities or vice versa if fixed income suddenly took a hit, says Dean Kohmann, the vice president of 401(k) plan services at Charles Schwab (SCHW)
Just watch the fees. For 401(k) investors, the risk of attracting fees and tax consequences when rebalancing is moot. However, in regular, taxable brokerage accounts, pay attention to possible transaction fees and taxes, Kohmann says.
Make investing automatic
To avoid having to spend time rebalancing your investments going forward, consider investing in mutual funds that do the work for you. For instance, Kohmann suggests looking at target-date funds or mutual funds that automatically transition into more conservative investments the closer you get to your expected retirement date. He also likes risk-based funds, which task professional money managers with rebalancing a fund s investments on a regular basis. Note, however, that unlike target-date funds, investors in many risk-based funds will need to switch to more-conservative funds themselves as they near retirement, Kohmann says. These funds also tend to have a built-in diversity of investments such as large-, mid- and small-cap funds as well as a blend of high-yield and corporate-grade bonds with varying maturities, he says.
Be aware, though, that both target-date and risk-based funds can be pricey. These so-called fund of funds often charge two sets of expenses -- those posed by the underlying funds and an overarching management fee. Paying high expense ratios on a fund that, say, only performs modestly can erode investors savings overtime. Note that not all fund companies charge a broader management fee on these types of investments, however.
To the degree that share prices for top-tier companies have suffered, downturns can offer a great opportunity to buy stocks and stock mutual funds, says Kohmann. But rather than plow everything into those investments all at once, which could open you up to big losses if the market falls further, try to invest little by little. This investment strategy called dollar-cost averaging advocates regularly investing equal dollar amounts over set periods of time to help reduce some of your investment risk -- not to mention the unease associated with making a large purchase all at once, he says.
Widen your investment universe
If you do have some cash to invest, think beyond just your 401(k), where you only have a handful of investment options, suggests Walbert. Instead, consider setting up a regular IRA where you have more options, including those than can hedge the market. You might also roll part of your 401(k) to an IRA, tax free. Of course, doing so depends on your plan administrator and the rules that govern your 401(k) plan, Walbert says.