The Three “R”s of Retirement Will Get You Through this Mess
by Marc Bastow
If the recent market correction hasn’t scared you just a little bit, than chances are you are either sitting on a mountain of cash, or you’ve avoided looking at that 401(k) account. So yes, you are allowed a bit of a heartburn moment.But that’s as far as you should let it go…a moment.In a minute we’ll go over the Three R’s of Retirement and how using them will get you through this mess.
But first let’s talk about China. China’s been on everyone’s radar screen as an unlimited engine of growth for the better part of the last three years. Indeed, the incredible success of the Alibaba Group Holding Ltd. (NYSE:BABA) IPO last September was fueled in part by it’s projected revenue growth in China.
Similarly, many US corporations have seen their share prices rise on an expected bump in sales from the China market. Apple Inc. (NASDAQ:AAPL) is probably the poster child for that hope, as much of its iPhone success is to linked to China’s consumer market.
We’ve been warned about China for some time, but most (guilty) didn’t heed that warning enough. Still, optimism exists. Harvard University economics professor Kenneth Rogoff, who raised some very early red flags, believes that China’s trillions of dollar in reserves will help it, and the global economy, survive the fallout.
It’s time to heed some suggestions on what to do now. I call these the three “R’s,” and recommend you do them before your next (financial) crises.
The Three R’s of Retirement
1) Reassess Risk
Think long and hard about your risk tolerance. Much of that thinking has to do with your time horizon and of course your portfolio (I’ll get to that next). The longer your time before retirement, the longer you have to recover from any dips, downturns, or even bears.
If you took your money out in 2009 in a panic (meaning long before you actually needed it) you’ve missed out on one heck of a rally. Sure, if you need the money tomorrow maybe you don’t want to hang around much longer.
But I always tell my children “you haven’t lost anything until you sell below cost.” So think about these two questions before you act:
- Are you within five years of full retirement?
- Will you need a big chunk of cash to cover an investment or purchase in the next 12-18 months?
If the answers are “no” than this correction is a relatively meaningless fiscal event that you can weather.
If there’s one foolproof way to manage the risk in your portfolio (notice I did not say “guarantee against risk) it’s to constantly monitor and rebalance your holdings over time. And now is a good time to revisit the idea. There is no magic bullet mix of course, as with everything in the market timing and risk profile are key.
But if you are loaded up with 85% in stocks, and in particular volatile stocks like technology, and biotechnology equities, or even worse, are playing the options game with (or worse, without) those issues, it’s time to change. But rebalancing goes deeper than just stocks.
One of my favorite advisors is Barry Rithotz, a market guru and advisor with an eye to safety and security…not to mention thoughfulness.When Ritholtz talks about rebalancing he means asset classes, not just stocks. Take a look at your bond, equities, real estate, commodities and other assets, add them up and determine where you stand today.
Make changes as necessary. This primer by Ritholtz is a great place to start.
You’ve got the hard part out of the way if you’ve followed my first two “R’s”. Now it’s time to act. What’s your first order of business? Open up the IRA or 401(k) spreadsheet, and get busy digging into those holdings.
Make sure if you’re holding ETFs and stocks in those accounts you aren’t invested in the same crossover stocks. What about bonds? What are the durations of any individual bonds? Do they match your investment time horizon and risk profile? Do you own real estate? Is is working for you?
Tough questions. But it’s all part of retirement maintenance and good stewardship.
When your computer is on the fritz and you are out of ideas, you close it down and boot it up again. There’s nothing wrong with that notion for your financial health, too.
Look, nothing will take the sting out of market losses. You wince, you complain, but in the end, you want to control as much as you can. So go ahead, get that second cup of coffee and breath easier.