Afraid of a Stock Market Correction? Get a Plan

Lately it seems as if every client or potential client I see asks about the possibility of a looming market correction.

Investors are loving these good times, but they’re smart — they know the market runs in cycles, and the good times can’t last forever.

The markets keep hitting record highs. We’re in the second-longest bull run in history. And yet there’s uncertainty, too, globally and in this country with our new president.

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When people ask if a correction is coming and what they should do to prepare, my answer for most is: Stay the course.

Whether you’re still working or already retired, consistency pays off. Especially in uncertain times, when a market correction is on many people’s minds, it may be best to stick to your plan. If you don’t, if you overreact, you could end up making financial decisions that may set you back in your strategy.

Of course, if you’re worried that the plan you have in place is not the best, that’s a different conversation. Then it may make sense to make some changes. If that’s the case, here are a few steps to consider:

1. Get professional advice.

Perhaps you’ve been handling things just fine on your own with your 401(k) or 403(b). As you near retirement, however, it’s time to speak to a specialist who can help you take the focus from accumulation and growth and put it on income planning and asset protection.

Many financial professionals will consult with a potential client once or twice with no obligation, so you can get a feel for whether you’re a good fit. You should ask for an analysis to see if there are any redundancies in your current portfolio, if you are truly diversified and if you are paying any unnecessary fees.

You also should talk about risk — how much you can stomach emotionally, how much you can afford and how much is in your current portfolio. Your financial professional can use a program like Riskalyze to help assess and align your risk. That is especially important if you’re anticipating a market downturn and might be tempted to make trades based on your anxiety.

2. Set up a retirement blueprint.

A lot of people have piles of statements from different accounts, but that doesn’t always mean they have a strategy in place. In retirement, you need a detailed plan for your money — and that plan should help give you more confidence that you’ll be OK.

People tend to get out of the market when it’s down, and by then they may have already lost money. Then they may get back in when it’s coming around again … but by then, most of the gains could already have been made. That bad timing can be very costly.

3. Know the difference between a pullback, a correction and a bear market.

Everyone is talking about a coming correction, but what exactly does that mean? It isn’t the same as a pullback — typically defined as a short-term decline of 5% to 9% from a recent high. And it isn’t as menacing as a bear market, which is a downturn of 20% or more that can last for months.

A correction is the middle ground — a 10% to 19% drop from recent highs. It’s a little scarier than a pullback, but it’s still temporary. It is sometimes an indicator that we’re going to have a bear market, but that’s not always the case. It can be an opportunity for investors hoping to get discounted prices. Unfortunately, it’s also when some people go wrong based on their emotions. Fight the instinct to flee.

4. Diversify.

The old-school equation for diversification is a 60-40 split between equities and bonds — and that’s not always a bad scenario. But these days, there are so many more options, both for protection and growth.

If interest rates continue to rise, it could have a ripple effect, and the bond market likely will suffer. In retirement, that may not help you as an inflation hedge, so it’s important to look at alternatives such as annuities. I know, “annuity” is a dirty word to some financial professionals — but that could be because they either can’t sell them or they don’t really understand how they work. It’s unfair to broad-brush them all with the same bad rap. A good annuity can be a valuable piece of your plan. It’s a long-term financial vehicle — the insurance company gets to use your money for a pre-determined number of years — but that’s not a bad thing for someone who is 60 years old. Annuities aren’t for everyone, though, so ask your financial professional if they would be a fit for you.

If you’re ready to make a change or create your first real retirement plan, find a financial professional who is focused on informing and enabling you, not selling you products. And be careful about what you read and hear. It’s good to have information, but what you see in the media isn’t necessarily tailored to your specific needs.

An experienced and knowledgeable financial professional with a retirement focus can help equip you to work toward your goals — while considering uncertainty in the market.

Kim Franke-Folstad contributed to this article.