8 Strategies to Reduce Market Exposure
Over a 10-day period in December 2018, the Dow Jones Industrial Average (DJIA) dropped by more than 350 points six different times. It then experienced its largest increase on record – a 1,000-point gain in one day. This dramatic volatility fueled speculation that we are on track for a long overdue market correction in the near future.
Most investment advisors discourage long-term investors from engaging in market timing, which is the strategy of buying and selling based on market movement. The general consensus is that no one can accurately predict upswings and downturns, and history shows that staying invested over the long haul is generally the best strategy.
However, there are scenarios in which investors might wish to reconsider their portfolio positions. Specifically, people who have recently retired or are nearing retirement, as they should be very careful about market losses at this juncture. When a portfolio experiences a steady sequence of poor returns this close to the distribution phase of retirement, there might not be enough time to make up for investment losses.
If you are rethinking your stock exposure, consider the following strategies to help reduce the impact of volatility.
- Consult with an experienced adviser to see if your current plan is “stress-tested” to meet your financial goals for both now and in the future.
- Protect your portfolio with a strategic asset allocation plan and diversified holdings designed to weather every type of market environment.
- Reconsider the overall risk level of your portfolio if you start to feel anxious when the market declines.
- Consider reducing exposure to your most high-risk stocks and moving to more conservative, all-weather options.
- Seek out lower-risk opportunities with overlooked upside potential across different sectors and countries.
- Rather than moving to a more conservative allocation all at once, deploy a regular, automatic transfer strategy. This works like the reverse of dollar cost averaging so that you don’t dump all of your stocks when prices drop.
- Rebalance your allocation periodically to ensure that stock market gains or losses do not make your portfolio too risky or too conservative.
- Consider using a portion of your assets to create a source of guaranteed income during retirement, such as an annuity.
Despite predictions regarding a market drop in the near future, it might be a good idea to maintain stock market exposure throughout retirement to help ensure you don’t run out of money. Assets invested for more than a decade are likely to recover from short-term losses.
Also, if you are still working, it is a good idea to continue investing automatically in a retirement savings plan. This enables you to take advantage of buying stocks while prices are low, as new contributions will buy more shares. If you’re not comfortable continuing to invest during a market correction, use your excess cash to pay down debt while waiting for your portfolio to recover. Reducing your liabilities can help increase your overall net worth despite the market correction.
Finally, recognize that market pundits have been predicting a substantial decline for several years now. And yet, fundamental economic indicators are strong. Unemployment levels remain low, inflation and interest rates are relatively stable, companies are well capitalized, and both investor and consumer confidence remain high.