As as investor, if you're feeling calm about this long bull market, don't let the lack of volatility lull you to sleep. The risks of a pullback are still there.
Do you actually know how your portfolio would react in another downturn?
When was the last time you took a look at your retirement investments and subjected them to a stress test? We are now multiple years into what feels like the longest bull market ever. However, anyone taking a peek at the past knows that "what goes up must come down." And in the case of this current ride, it's not a question of how, but when the market will correct itself and turn bearish. The lack of volatility continues, but for how long?
Over the past two decades, we have seen two major market downturns, courtesy of the dot-com bubble and the financial crisis. During each of these incidents, the stock market fell at least 45 percent, meaning investors with a high concentration of their eggs in the wrong basket watched as their robust investments were sliced and diced.
Obviously, there is no such thing as a crystal ball. As advisors, we can't predict how long a winning streak will continue or when a market downturn will occur. But we can always counsel clients on how to take proactive steps.
Making the right moves now will help alleviate some of the pain your portfolio could endure when the next downturn strikes.
For example, are you overweight in stocks? One look at your most recent statement and you'll probably note that these types of investments have most likely kept pace with the market. And who doesn't love that? But if you are heavily invested in stocks, exposure to downturn risk goes hand-in-hand with the sky-high market. If you are nearing or in retirement, the goal is to slow your risk exposure down before it's too late. Having stocks in your portfolio could provide great long-term growth, but too much could wreck your retirement.
The best way to thwart future pain is to check in on your portfolio annually and put it through a few paces. A savvy financial advisory firm will use software that allows clients to run a stress test and see what their portfolios might do if the market tumbled 20, 30 or 40 percent. Clients are able to pinpoint what may do well, what could falter and what steps, if any, they should take to mitigate risk.
In order to conduct your own stress test, you will want to know what portion of your portfolio is allocated to which investment vehicle and how this directly exposes you to risk. You will want to know how your investments would perform during a market downturn, paying specific attention to what would perform well and what wouldn't.
It is also a good time to consider a downturn's impact: What would be left in your retirement savings, and what would that mean for your daily living? The reality is that as you close in on retirement, you are going to start tapping into it. It is not ideal to have large risk in your portfolio at that point.
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