The market’s been a real bull lately. The Dow Jones industrial average and the Standard & Poor’s 500 index each reached new highs recently, and the Nasdaq Composite Index found its highest level in years.
When stocks are on a roll, it’s easy to lose track of the long term. That’s why you should have a financial plan that includes a retirement strategy — so you don’t have work too hard during the running of the bulls.
Here are five things you can do during an upturn to maintain an appropriate investment lineup:
1. Stay the course.
Before this run began, you (hopefully) had a retirement strategy.
You assessed your retirement hopes and dreams. You created monetary goals based on the retirement lifestyle you hope to achieve. You determined your risk tolerance. And you created a mix of investments that was diversified across asset classes.
In accordance with your personal situation, you've already charted a course that allowed you to take on an acceptable level of risk. So don’t allow yourself to be blown off course now by the windy pundits or the sheer temptation of this market upswing.
You can adjust your investments to fit current market conditions, if appropriate; but you need to stick to your overarching retirement investing plan.
2. Embrace dollar-cost averaging.
When the market is on an upswing or a downswing, the saving strategy of dollar-cost averaging — investing a set amount at set intervals — becomes particularly important. In order to balance the positive and negative effects of market volatility over time, never stray from dollar-cost averaging.
Invest the same amount of money either monthly or bimonthly into the same mix of funds. The steadying effects of dollar-cost averaging allow you to benefit from market upturns and downturns alike, but it only works if you’re consistent.
3. Don’t let yourself chase returns.
You see an asset class or an industry or a company that’s on fire. It looks like it will keep climbing forever. That makes it very tempting to shift a sizeable portion of your portfolio toward what’s been rocketing skyward.
But making decisions based on what’s hot can destroy your portfolio's diversify, and you could end up taking on more risk than you should.
Chasing returns is nothing more than an attempt to time the market. And that’s a risky endeavor even for highly educated financial experts; for the rest of us, the risk can be off the charts — definitely not appropriate for retirement investors who have a nest egg to protect.
As time passes, the various asset classes in your portfolio will grow or shrink at a different pace. After three to six months, such gains and losses could leave your allocation — the mix of investments you’re holding — unbalanced.
If something is unbalanced, you can safely assume it needs to be rebalanced. To rebalance your investments means you update the allocation of your existing funds so they again match the mix you originally designed for your portfolio. Rebalancing allows you to maintain your appropriate level of risk, whereas an unbalanced portfolio may lead your portfolio to become either too risky or too conservative.
Additionally, rebalancing regularly (quarterly or semiannually) has the additional benefit of being a process that’s easy to remember and do.
5: Brace yourself
I do not mean to be alarmist. I do not predict a drastic drop of any kind. But even the smallest drop in market returns — or in retirement account value — can shock people after a period of high returns during a bull market.
So be ready for a little volatility. Be prepared for a slowdown. Understand that we could see an adjustment. These things may not happen tomorrow or next month or in two years. But they will happen, and preparing yourself for the fluctuations of normal market behavior can keep you from panicking when it happens.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.