The stock market can trigger a shock when we least expect it. April 10th was no different.
U.S. consumer prices were higher than expected in March, according to the latest data from the Bureau of Labor Statistics. The consumer price index rose 0.4% month-on-month and 3.5% annually, an acceleration from February’s 3.2% annual price increase.
This news shocked many investors who jumped on the “let’s sell stocks” bandwagon. The result at the end of the day: The Dow Jones Industrial Average (^DJI) lost 1.1% and the S&P 500 (^GSPC) lost almost 1%.
The reason for this rush to dump stocks was emerging concerns that inflation could rise again and the Federal Reserve might not cut U.S. interest rates as much or at all this year. U.S. stocks fluctuated again on April 11 after another economic report, the Producer Price Index, reported a smaller increase than expected.
None of these things are in your control.
It may have been just a blip, but if inflation doesn’t cool and the Federal Reserve pushes to delay rate cuts for longer, the market could stall again.
Then what? I spoke with several experts about whether it’s better to stay the course or consider making some adjustments to retirement-focused holdings.
Here’s what to do with your retirement savings when markets are unstable.
Focus on long-term goals
Last year was pretty encouraging for many Americans’ retirement savings, with the S&P 500 up 26.29% and the Dow Industrial up 13.7%.
So you can be forgiven if this week’s fluctuations have left you unsettled – and unsure what to do.
“There is a fine line in how investors should react to volatility,” Christine Benz, director of personal finance at Morningstar, told Yahoo Finance. “On the one hand, they should, above all, ignore it and not react. On the other hand, it’s easy to become complacent, especially when you consider that stocks’ performance has been exceptionally strong for much of the last 15 years.”
Benz said that for investors who hold stocks, the contents of their portfolios have changed, even if they have not actively added to them. For example, a portfolio that was 60% stocks and 40% bonds in 2019 would have been 70% stocks and 30% bonds at the end of 2023, simply because the value of stocks increased so much, she said .
“Meanwhile, bond and cash yields have improved greatly, which in turn improves their return prospects,” Benz added. “And we’re all five years older, and many retirees want a more conservative asset mix as they get older.” So retirees who haven’t reconsidered their asset allocation in a while should particularly consider this, Benz said.
Financial advisors generally recommend rebalancing (adjusting the mix of your stocks and bonds) if your portfolio deviates more than 7% to 10% from your original asset allocation aligned with your time horizon, risk tolerance, and financial goals. To roughly determine what percentage of your portfolio should be stocks, subtract your age from 110. So a 60 year old would have 50% in stocks and the rest in bonds and cash.
However, if you feel like doing something big, proceed with caution.
“It’s very difficult to time the markets,” Marguerita M. Cheng, certified financial planner and CEO at Blue Ocean Global Wealth in Gaithersburg, Maryland, told Yahoo Finance. “You may know when to get out of the market, but you may not know when to get back in. It’s very hard to be right twice.”
If you’re automatically setting aside money in your employer-sponsored retirement plan or automatically contributing to a Roth IRA or traditional IRA and are years away from retirement, take a breath.
“You are constantly investing when the market is high and when it is low, and that means that whether the market is going up or down, the performance of your investments will remain the same over the long term,” Cheng said.
If you have a target fund or a static asset allocation fund — one that is considered conservative, moderate or high-growth — the fund manager will adjust and rebalance the portfolio for you, Cheng added. These portfolios are automatically rebalanced because they are tied to an estimated retirement year (e.g. 2055 or 2060) and therefore tick more conservatively as the years go by.
The bigger issue is not what happened this week, but what happened last year. Due to the rise in stock prices over the last year, your investment portfolio may become unbalanced in terms of diversification with a balance of cash, stocks and bonds, or stock and bond funds.
Time for your annual check-up
This is an opportune time to think about financial planning and long-term goals. This could include taking a fresh look at your rebalancing strategy, Cheng said.
“They’re not going to sell everything; They will just reduce to make sure your 60/40 portfolio is not 65/35 or 67/33,” she said. “Rebalancing your portfolio can help you with risk targeting, which means adopting an appropriate level of risk tolerance and risk capacity.”
For example, if you’re worried there’s a big market sell-off nearing retirement, it might be a good time to rebalance your retirement portfolio so you have some cash on hand and can take profits on some of your assets’ stock appreciation. This is to protect you in the first few years of your retirement. When the market falls, you don’t have to sell stocks at a loss to cover your living expenses.
“Stocks carry market risk, but as a long-term investor you want to make sure you stay invested in stocks,” Cheng said. “And by the way: everyone, even someone who is retired today, is a long-term investor.”
Bonds also have to be involved
“The current high interest rates on fixed income mean it’s a good time to shift some of your assets from high-risk stocks to low-risk fixed income investments like Treasury bonds and CDs,” says Ken Tumin, a senior industry analyst at LendingTree and founder of DepositAccounts. com, told Yahoo Finance. These returns have fallen somewhat in recent months, but remain high compared to previous years.
“With inflation and the economy making it difficult for the Fed to cut interest rates any time soon, Treasury bills and bank CDs should continue to offer yields higher than what we have seen in more than a decade,” Tumin said .
In fact, some certificates of deposit and high-yield savings accounts pay more than 5%. The most attractive CD interest rates – which are mainly offered by online banks – were recently over 5.5% for a one-year certificate.
And with the Fed likely to delay rate cuts for a while, longer-term bond yields could be attractive.
“In short, we have a chance before interest rates start falling and bond prices start rising,” Lisa AK Kirchenbauer, founder of Omega Wealth Management in Arlington, Virginia, told Yahoo Finance.
The message from all these advisors is clear: Don’t make any hasty moves, but retirement accounts may need a little tweaking. A check never hurts.
Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 books, including “Staying in control at 50+: How to be successful in the new world of work and “Never too old to be rich.” Follow her on X @kerryhannon.