As the major stock market indices post gains and reach new all-time records, it is natural to wonder if a correction is coming. What goes up, must come down, right? At the time of this writing, the current bull market (that started in March of 2009) is now the second-longest in recent US history. So, what do you do if you are afraid that a drop is just around the corner? Here are some options to consider:
1. Go to Cash. If you believe that a market drop or crash is imminent, then sell. If you can’t sleep and you’re a nervous wreck, then go to cash. What’s the worst that can happen? You miss out on some additional gains? What if you don’t go to cash and we have a large drop? You’ll be kicking yourself, especially if you are retired or nearing retirement. With all this said, there are consequences to “selling out.” If you sell holdings in a “non-qualified” account (not an IRA, 401(k) or other tax-deferred retirement account), you will likely incur capital gains, and there could also be transaction costs.
2. Hedge Your Bets: Maybe you’ve been thinking about reducing how much risk you are taking. If you’re heavily invested in the stock market, consider moving half to something with less risk. This is especially true, and important, if you expect to draw on these funds within the next five years. Drawing income from investments that could lose significant value is one of the biggest gambles of all. Don’t do it. Shift some funds to less risky choices and draw your income from those accounts. Suitable choices could include: money market/savings accounts, CDs, fixed and index annuities, and a well-diversified bond portfolio.
3. Rebalance: If you’ve enjoyed gains in your investment accounts, it’s likely that some parts of your portfolio have done better than others. This can create an imbalance and leave you at greater risk of loss, should your “high-fliers” come back down to earth. Getting out of the stock market isn’t the only way to reduce risk. You can also spread your funds across different sized companies, various sectors of the economy, and around the world. You can also introduce bonds to the mix to help tamp down volatility.
4. Pay Off Debt: While I don’t like trying to “time the market,” I do like the idea of cashing in investments to pay down debt. If you’ve got investments that have done well, and also have outstanding debt with an interest rate of 5% or more, consider selling some investments to pay the debt down or off completely. If you owe $50,000 on a variable rate credit line that costs 6% interest, now may be the time to pay it off. Always consider the tax consequences, but you could effectively “earn” a “guaranteed” 6% by cashing in enough to pay off the $50,000. In my experience, debt-freeinvestors tend to be better investors because the debt doesn’t weigh on their investment choices.
If you’re not sure what strategy is right for you, you can pay a financial planner a fee to analyze your situation, evaluate your portfolio, and give you options!