FA Playbook

A correction could be coming. Here's how to protect your retirement portfolio from the dip

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Key Points
  • The Covid-19 recovery could have one more bump in the road: a market correction.
  • A 10% to 20% market drop doesn't have to derail your short- and long-term goals.
  • Take these steps to reevaluate your positions and make sure you're still on track.
LaylaBird

There could be one more big bump in the road as the economy recovers from the Covid-19 pandemic: a market correction.

Moody's Analytics economist Mark Zandi is warning there may be a 10% to 20% pullback in the markets prompted by the Federal Reserve's current policies.

In fact, the dip may have already started, Zandi said in an interview with CNBC on Friday. And unlike some recent market drops, it may take time for stocks to make a full recovery, he said.

Experts say you don't have to let a dip in the markets derail your retirement.

When it comes to your 401(k), there's one piece of advice most financial experts agree on: Stick to your goals.

VIDEO6:2006:20
Economist Mark Zandi warns stocks are vulnerable to a 10% to 20% correction

Prioritize your near-term goals

As you evaluate your 401(k) and other investments in turbulent times, make sure to consider how soon you will need the money.

"Stock ownership should always be for a long-term hold: five-plus years," said financial advisor Scott Hanson, a certified financial planner and co-founder of Allworth Financial in Sacramento, California.

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If you have money tied up in stocks that's earmarked for your child's tuition next semester or for a down payment for a house, now is the time to sell, Hanson said.

For goals with a time horizon of five years or less, consider moving that money to so-called stable value or fixed-income funds, said CFP Ted Jenkin, CEO of Oxygen Financial in Atlanta

Remember your long-term time horizon

When making decisions as to what actions fit you best, your age is key.

"If you're 70 years old, you have no business having 70% of your money in the stock market," Jenkin said. "You should have 70% of your money in fixed income."

Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, said she encourages investors to allocate their investments in buckets.

Money for short-term goals should be in safe investments, while funds for intermediate and long-term needs can gradually get more risky.

Retirees, in particular, may want to put money for required minimum distributions in a stable value fund or short-term bond fund, Cheng said, where they likely will not have to sell at a loss. Those mandatory distributions start when you reach age 72.

Buy the dip

Down or volatile markets provide an opportunity to buy stocks when prices are lower.

That means you want to keep contributing to your 401(k) or other retirement funds on a fixed schedule, Cheng said.

"If they're not comfortable, they can pare down the risk in their existing dollars, but keep their ongoing contributions the way they are," Cheng said.

Another tip to consider when markets are down: Ask your payroll department to take more out of your paycheck to put in your 401(k) for one pay period, Jenkin said.

As long as you have money in savings to pay your bills, putting more money in the market when markets are declining can mean a greater upside when it recovers. "That can be a really good opportunity," Jenkin said.