The global economy is once again teetering on the edge of a precipice, which could be giving you jitters about its potential effects on your retirement savings. So let me offer my thoughts and advice.
This time, the economic worries center on the seemingly never-ending Euro crisis, with Greece and Spain on the cusp of collapse (though Spain’s banks are likely to receive a $126 billion Euro Zone bailout, it was announced last weekend). Meanwhile, the economies of China, India and other major emerging markets are slowing and the U.S. economic engine is decelerating, too. Political leaders in Europe and the United States seem unable to act, while the central banks are scrounging for additional buttons to push.
U.S. investors seeking safety from the potential fallout of a Lehman Brothers-type financial firestorm in Greece and Spain have pushed yields on U.S. Treasuries — the world’s safest security — to record lows. Stock markets around the world have been particularly volatile, and the underlying trend is down. For example, the Standard & Poor’s 500 has fallen some 10 percent from its April peak.
Of course, bad news doesn’t mean disaster is inevitable. Still, the uncertainty about when and how these economic problems will be solved can sometimes be unbearable.
After all, who in their 50s and 60s doesn’t shudder recalling the impact of the 2008 U.S. financial crisis on their retirement portfolios? Once the stock market peaked in October 2007, it plunged nearly 57 percent over the next 17 months. Today, the stock market is still 16 percent below its 2007 high.
What should investors do with their diminished retirement savings this time? Get out of the market as fast as possible to avoid losing even more money when the world falls apart? Double down on stocks and bet that the gloom is vastly overstated?
Back to Square One
Let’s revisit the basics.
First: Do you really need to do anything with your portfolio, based on what’s happening in Europe?
My suspicion is that many savers are fine, and only need to make perhaps a tweak here and there in their 401(k) and IRA portfolios.
Since the 2008 downturn, we’ve suffered through five brutal, turbulent years, including a bear market, the worst labor news since the 1930s and an anemic, jobless recovery. So many retirement savers have likely already adjusted their portfolios to reduce exposure.
The experience of the past several years has only reinforced the wisdom of time-tested investment advice for long-term investers. That’s hardly surprising, since the bedrock concepts were forged during previous catastrophic episodes, like the Great Depression of the 1930s and the Great Inflation of the 1970s.
As a reminder, retirement savers should keep their portfolios well diversified then gradually make them less risky as they get older, reducing the percentage of their investments in stocks and raising the percentage in bonds, bank CDs and money-market funds. (I don’t believe in citing a specific asset-allocation average for a particular age; people have different situations, goals and tolerances for risk.)
Dollar-cost averaging — investing the same amount of money in a retirement plan, like a 401(k), on a regular basis — is a smart strategy because it reduces the likelihood that you’ll succumb to the temptations of fear and greed. Actively trying to time the markets is hazardous to your wealth.
In today’s turbulent economic world, I think it’s especially wise to stick with high-quality investments. That means buying stocks of the brand name, cash-rich companies that are part of the S&P 500, rather than smaller, more speculative enterprises.
When it comes to bonds, I recommend purchasing U.S Treasuries, not “junk bonds” (debt issued by companies with little cash and lots of debt).
What about investing in international markets?
It’s tempting to bail on the basket case called Europe, especially since the continent is likely in recession. But assuming you’re exposed to Europe through a broadly diversified international mutual fund or 401(k) account, the critical question is whether you remain comfortable with a portion of your retirement portfolio exposed to overseas companies.
If your answer is “yes,” I’d stay the course. If it’s “no,” bail out.
Keep in mind that if you own shares of U.S.-based multinational corporations, either as individual stocks or in mutual funds or a 401(k), you probably have a fair amount of international exposure already.
I think the long-term growth story for stocks of companies in emerging markets is persuasive — but only for intrepid investors willing to withstand bouts of stomach-churning volatility. If you don’t have the tolerance for wild swings in your retirement portfolio, stay away!
Lesson From Global Turmoil
The real lesson of the current global market turmoil is that you should get more serious about preparing for retirement in a holistic way. As Ross Levin, a certified financial planner and head of Accredited Investors Inc. in Edina, Minn., says, “Retirement planning isn’t just an investment decision.”
Mr. Market may reward you or punish you for your portfolio choices; you won’t know until later on. But what you can do is focus on those areas of retirement planning where you have greater control: work longer, delay taking Social Security as long as possible and lower your investment expenses.
Just don’t tie yourself up in knots about events taking place on the global stage.
“Worrying is useless,” says Joel Larsen, a certified financial planner and principal at Navion Financial Advisors in Davis, Calif. “You need a plan.”
That’s good advice for all times. Especially now.