The dot-com crash in 2000. The 9/11 terrorist attacks in 2001. The collapse of the housing market in 2008. And now the coronavirus pandemic of 2020.
Over the past two decades, these events — which had huge financial, political and societal repercussions — have all been labeled “black swans.”
I suppose you could draw some comfort from the thought that each of these crises was considered so random, so rare and so difficult to predict that no one saw them coming — so how could you? But I really hope you don’t. Because for investors — especially those who are close to retiring — that’s some dangerous thinking.
There is always something coming.
The events that rock the U.S. and global economies may look a little different every time, but stock market volatility is normal. It’s something we always should be aware of and prepare for. Yet, I see investors make these same mistakes time and time again.
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1. They’re lulled into complacency by long periods of low volatility
It’s hard to blame investors for wanting to squeeze just a little more juice out of an 11-year bull market, but you have to know when to say when. The S&P 500 experienced declines of at least 10% (opens in new tab) several times during the past decade.
That’s no big deal for younger investors with plenty of time to rebound from a big loss. But pre-retirees and retirees who ignored those gentle reminders to rebalance their portfolios or transition to something safer got a nasty wake-up call in February and March.
2. They’re trying to time the market
Trying to predict the market’s movements is best left to the professionals. (And some professionals aren’t that great at it, either.) The average investor loses thousands of dollars a year because of bad decisions about when to get in and when to get out — often because their emotions get the best of them and they forget the fundamentals.
An adviser who is looking out for your best interests will tell you that sticking to a plan based on your goals, your time horizon and your individual risk tolerance is a better way to go.
3. They’re taking on too much or too little risk
Retirees and pre-retirees often come to me with portfolios that give them much more exposure to the stock market than they need. If there’s enough guaranteed income in your plan to cover your expenses in retirement, why not reduce the amount of equity in the portfolio to a more appropriate amount — enough to keep up with inflation, but not so much that it makes you nervous every time the market drops a bit.
On the flip side, I sometimes meet retirees who feel safer keeping all or most of their nest egg in low-risk but low-interest cash equivalents. This can jeopardize your long-range retirement plans. Inflation can eat away at your savings so slowly you might not notice, but if you expect to have a 20-, 30- or even 40-year retirement, it’s crucial to protect your buying power.
4. They aren’t truly diversified
Portfolio diversification — allocating money across many asset classes, geographical regions and sectors — can help with avoiding disaster in a downturn. If one stock tanks, others in different classes might not be as hard hit. Many investors believe keeping their money in two or more mutual funds solves that problem, but they aren’t necessarily getting the diversification they need if those funds hold the same or similar stocks.
Your adviser can audit your investments to avoid overlap and to make sure you aren’t overly allocated to any one thing — even if it’s something you love, like Apple stock, precious metals, real estate or the company you work for.
5. They’re ignoring the impact of future taxes
I don’t think anyone has ever thought, “Hmmm, these taxes are right in line with what I think I should be paying.” But if you aren’t happy with what you’re giving Uncle Sam now, well … just wait a few years. Most people’s taxes are low compared to what they could pay after 2025, when rates put in place by recent tax reforms are set to end.
There’s no time like the present to do some tax planning — whether it’s to help your future self, your spouse or your children. If we cycle back to a higher-tax scenario, you won’t regret moving some money to a tax-free Roth IRA. Think of it as another step in your effort to reduce overall risk.
6. They’re more worried about gains than managing risk
Investors are trained to concentrate on accumulating as much money as they can for retirement. But when you’re closing in on the finish line, accumulation should cede the spotlight to preservation. That means moving away from risky investments that are vulnerable to the market’s unpredictable movements and toward a distribution plan that’s focused on establishing enough reliable income to cover your monthly bills.
If your Social Security and pension payments won’t be enough, you’ll likely have to fill the gap with withdrawals from your savings. And if the market just happens to blow up right before or after you retire, and you haven’t protected enough of that money, your retirement could blow up with it.
7. They’re putting off getting professional advice
Remember the days when just about anybody who was so inclined could make simple repairs on their own car? Now, it’s all so complicated, most people won’t touch their car’s engine. (Some don’t even know how to lift their car’s hood.) It’s a similar scenario with financial planning, especially when it comes to retirement. You can keep dumping money into a 401(k) or IRA and hope for the best or do some DIY trading and see how it goes. Or you can work with a financial adviser — preferably a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional — to build a personalized, long-term plan that will help you achieve your retirement goals.
Retirement planning isn’t about predicting the unknown — it’s about preparing for it. And that means putting together a comfortable, comprehensive plan you can stick with regardless of what happens next in the stock market.
Appearances on Kiplinger.com were obtained through a paid PR program.
Kim Franke-Folstad contributed to this article.
Written by Richard W. Paul, CFP®, the president of Richard W. Paul & Associates, LLC (opens in new tab), and the author of "The Baby Boomers' Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead." He holds life and health insurance licenses in Michigan and Florida and is a Certified Financial Planner, Registered Financial Consultant, Investment Adviser Representative and insurance professional.
Richard W. Paul is the president of Richard W. Paul & Associates, LLC (opens in new tab), and the author of "The Baby Boomers' Retirement Survival Guide: How to Navigate Through the Turbulent Times Ahead." He holds life and health insurance licenses in Michigan and Florida and is a Certified Financial Planner, Registered Financial Consultant, Investment Adviser Representative and insurance professional.
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