Better-than-expected inflation developments last week helped stocks move higher, Ameriprise Financial chief market strategist Anthony Saglimbene pointed out in his final market outlook report of the year.
Year-over-year inflation hit 7.1 percent in November, down slightly from 7.7 percent the month before. Could this be the start of better returns, I dared to hope, as my retirement account moved up?
The Federal Reserve raised its benchmark interest rate as expected, adding that rate hikes to fight inflation would continue into 2023. Then, softer-than-expected retail sales in November and weakening manufacturing and service activity dented investor confidence, sending the stock market lower. again.
“Equities may still have more recalibration to do in the near term, which could keep volatility elevated into early 2023,” Saglimbene said.
I routinely check in with a group of financial experts to help you – and me – put things into perspective for the long term. I circled back and revisited what they said at the beginning of the year when the stock market delivered some deep declines. Your advice has not changed.
Here’s what to do if you’re feeling down about the recent stock market turbulence.
· You are a young investor. Time is on your side. “If you’re a long way from retirement, don’t worry about it,” said Dan Egan, managing director of behavioral finance and investing for Betterment, a digital investment advisory firm. “Focus on what can help you save more efficiently and keep putting money into tax-advantaged accounts or a 401(k) matching account.”
Keep the dollar cost average in the market, recommended Ernest Burley, a certified financial planner and owner of Maryland-based Burley Insurance and Financial Services.
With dollar cost averaging, you invest a fixed dollar amount on a regular basis, regardless of the price of the investment. When the market is down and you continue to invest, you buy in at lower prices.
“Don’t let short-term volatility derail your goal and strategy to achieve long-term gains,” Burley said.
If you’re young and don’t want to use your retirement plans for a long time, keep investing aggressively, said Carolyn McClanahan, a certified financial planner who founded the fee-only Life Planning Partners, based in Jacksonville, Fla.
Now is the time to add to your retirement account, even though the market is down, McClanahan said.
But to avoid the temptation to spend that money, make sure you have a savings fund for emergencies as well as home and car purchases, she said.
· You have 15 years or more until you retire. Stop watching the daily movements of the markets, which will only increase your anxiety.
As with actual seasickness, Egan said, “find a more stable fixity point and pay attention to it.”
Don’t bet on the stock market, said Greg McBride, financial analyst for Bank rate.
“The market will eventually come back and you’ll be on the train, not the platform, when it leaves the station,” McBride said. “A broad stock market index fund is the way to go because it minimizes your costs, and most investors fail to beat the market anyway.”
Lean into areas that reduce your portfolio risk, Saglimbene said, including high-quality stocks and bonds as well as income-producing investments.
And McClanahan said “the key to successful investing is knowing how much risk you can afford to take and committing to keeping the assets you don’t need for a long time invested in the stock market through thick and thin.”
· You are a few years away from retirement. If you’re worried about having enough income when you retire, consider pushing back your retirement date if possible.
“If you’re about to retire and the markets are down, it might be worth working a few extra years for the markets to recover,” Egan said. “Starting retirement when markets are down can reduce your disposable income.”
Egan pointed out that working longer has a threefold benefit. You get more savings. You have fewer years to cover. Your portfolio has time to recover.
Now is the time to build an emergency fund, so if you retire and the stock market crashes, you can use the money until things stabilize.
“If you’re close to cutting back on work, you should be less aggressively invested,” McClanahan said. “Make sure you understand how much you need in savings to be able to stop working.”
· You are retired. You should review specific holdings in your investment portfolios.
Choosing value-based strategies, dividend stocks and bucketing approaches can help you navigate multiple market scenarios, Saglimbene said.
In the case of using the bucket approach, “a short-term bucket of cash and high-quality fixed income can help you cover daily living expenses when markets are down, while your long-term bucket can stay invested through both up and down markets,” he said .
Whatever moves you make, take the time to consider the consequences.
As I wrote in early 2022, following the daily dips in the stock market will only make you sick or second-guess yourself—emotions likely to lead to long-term losses.
