Markets

Protect Your Retirement Nest Egg During the Trump Rally

Taking some profits on your stock gains isn't a bad idea. But don't rush headlong for the exits.

Stocks have soared since Election Day, propelled by visions of tax cuts, regulatory rollbacks and a government spending boom. From November 8, when Donald Trump captured the presidency, through December 15, Standard & Poor’s 500-stock index climbed 5.7%. The Dow Jones industrial average, which is filled with companies that tend to perform well when the economy is in overdrive and is closing in on the 20,000 mark, gained 8.3%. And the Russell 2000 index, which tracks small-capitalization stocks, rocketed 14.3%.

It’s gratifying for any investor to realize such generous gains in so short a time. But retirees, especially, have a vested interest in making sure their newly plumped-up nest eggs remain intact. After all, the market’s sizzling rally has pushed most market benchmarks well beyond what was expected of them in 2016—and even beyond some projections for 2017, including ours.

Even so, investors who rush for the exits could miss out on further gains. The economy is on sound footing, corporate America has emerged from a yearlong earnings recession, and consumer confidence is soaring—all good signs for stocks. Price-earnings ratios are stretched, with the S&P trading at 17 times estimated earnings for the coming 12 months, above the average of 15 for the past five years but nowhere near historical extremes. “There’s enough to suggest a little more upside next year,” says Ryan Detrick, senior market strategist at LPL Financial, who sees stock gains in the mid-single-digit percentages in 2017.

Don’t be put off by record highs for all the key domestic stock indexes. Research from LPL shows that such highs tend to come in bunches. Going back to 1928, after reaching a record, the S&P 500 and (predecessor indexes) hit another high within one month 91% of the time. Within three months, the index achieved another high 97% of the time and within a year, 99% of the time.

And even if you believe the nearly eight-year-old bull can’t last much longer, the end of bull markets can be painful to miss. Over the past 80 years, bull markets have delivered average gains of 25% in their final year, according to Bank of America Merrill Lynch. “The problem with market timing is that it is very easy to get out when markets are up but extremely difficult to pick a time to get back in,” says James Kinney, a certified financial planner in Bridgewater, N.J., with Financial Pathway Advisors. “Athough a pullback may seem likely, there is no telling when it will happen or how far the market may run before it does.”

Retirees are understandably nervous about making up any losses incurred when the market heads south. But with retirements that span decades, investors might have more leeway than they think. “A lot of people are looking at 30 or 40 years in retirement. That’s a pretty long time horizon,” says Tracie McMillion, head of asset allocation strategy at Wells Fargo Investment Institute, the banking giant’s investment-research arm. “For most people, stocks will be a more sizable component of their portfolio than they might have thought.”

No one ever went broke taking profits

The key for retirees is to establish a portfolio that doesn’t cause anxiety about market fluctuations. Milad Taghehchian, of Pioneer Wealth Management Group, an investment firm with offices in Dallas and Austin, Texas, recommends that his clients have six to nine years’ worth of anticipated withdrawals invested conservatively, mostly in short-term and intermediate-term investment-grade bonds, with perhaps a touch of high-yielding junk bonds or emerging-markets debt. With your necessary expenses tucked away, the stock market’s ups and downs should be easier to stomach.

Still, an old Wall Street adage rings a bell with many investors these days: No one ever went broke taking profits. The best way to take profits is by rebalancing your holdings, selling some of what has done the best and using the money to buy the laggards. Financial planner Greg Phelps, at Redrock Wealth Management in Las Vegas, rebalances clients’ holdings when they’ve breached the desired allocation by 20% to 25% in either direction. For example, sales are triggered when an investment meant to account for 10% of a portfolio’s assets climbs to 12%. Phelps says he’s seeing sell triggers in clients’ small-cap stock holdings and in so-called value stocks—those that tend to trade at discounts (as opposed to stocks of fast-growing companies).

Funnel profits into beaten-up areas that present good value, such as emerging-markets, health care and technology stocks. Although emerging markets started 2016 with a bang, they have been unfairly beaten up during the so-called Trump rally because of fears of potential trade restrictions and the rising value of the dollar. LPL Financial chief economic strategist John Canally says those fears are excessive. Meanwhile, the earnings picture for companies in developing nations is improving. Funds worth exploring include Baron Emerging Markets (BEXFX) and Vanguard Health Care (VGHCX), both members of the Kiplinger 25, and Vanguard Information Technology (VGT, $123.56), an exchange-traded fund that is one of the Kiplinger ETF 20.

Don’t neglect your fixed-income holdings when you’re revisiting your portfolio, says Canally. “If you’re not braced for rising rates, you should be.” He recommends a floating-rate bank-loan fund. These funds invest in short-term loans that banks make to companies, with rates that adjust upward as short-term interest rates rise. Try Fidelity Floating Rate High Income (FFRHX) or PowerShares Senior Loan Portfolio (BKLN, $23.30), a member of the Kip ETF 20. Canally also suspects that investors will be surprised by the resurgence in inflation next year, and he recommends that they make room in their portfolios for Treasury inflation-protected securities, or TIPS, which you can buy directly from Uncle Sam.

Finally, if fear of a downturn has you losing sleep before it even happens, it might be a signal that you need to ratchet down the risk level of your portfolio, allocating less to stocks and more to bonds and cash. And thanks to the Trump bump, you’re more likely to be able to dial back without compromising your investment goal.

Most Popular

Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer

The IRS has an online tool that lets you track the status of your third stimulus check.
April 4, 2021
Third Stimulus Check Calculator
Coronavirus and Your Money

Third Stimulus Check Calculator

Find out how much your third stimulus check will be using this handy tool.
April 8, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
How to Retire Well During Difficult Times
retirement planning

How to Retire Well During Difficult Times

When the financial environment is challenging (like now) it’s important to plan ahead and avoid some all-too-common retirement mistakes.
April 11, 2021
Don’t Make the Same Mistakes in 2021 – Keep Your Retirement Plan on Track
retirement planning

Don’t Make the Same Mistakes in 2021 – Keep Your Retirement Plan on Track

Looking back at 2020 gives retirement savers a good perspective for how to proceed going forward. Staying flexible and being prepared to change course…
April 11, 2021
10 Questions Retirees Often Get Wrong About Taxes in Retirement
retirement

10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?
April 7, 2021