How to protect yourself from the next stock market crash
The market is at all time highs, now what? We are all trying to figure out when will we have the next stock market crash and how big it will be. If you are a Babyboomer and you are in or near retirement, you may not be able to survive another big one unless you are willing to go back to work or work longer. Here are six things you can do to help protect yourself.
Have a warning system.
Warren Buffet has two famous rules when it comes to investing. Rule #1 is to not lose money. Rule #2 is to not forget about rule #1. When it comes to money in retirement, you should have a system to help prevent losses. Riding a stock to all-time highs is great, but no so great if you held on to it too long to have it go below what you started with. There is a time to walk away with your gains. That is why you should have a warning system to alert you when the market is going down. Reacting to your quarterly reports or your investment advisor may not be the best thing. When you are in a 401k, you a pretty much your own alert system. When it is too late, the common phrase you will hear is “just hang in there, it will come back” over and over again. That is why we use a system called WealthGuard to help our clients with all their accounts. Whether it is a held away account or account this is under our control. Take a look at the video here to see what WealthGuard does. Whether it is WealthGuard or something else, you should have something to provide a safety net and alert system for your retirement accounts.
Seems rather simple, but is more difficult than buying a bunch of mutual funds or exchange-traded funds. We all know we should own more than a couple stocks to help with diversification, but you also need to be diversified in multiple asset classes as well as multiple sectors. Be careful as you pick different mutual funds or exchange-traded funds as they may give a false indication of diversification when in reality mutual funds or exchange-traded funds you own may have identical holdings or stocks. In that case, you really aren’t that well diversified. One last thing, by putting your money in a target-date fund doesn’t make you diversified or safe.
Don’t risk more than you can lose.
Most of us will understand our own risk tolerance, which is more emotional, but understanding you risk capacity is even more crucial. Your risk capacity is the amount of money you can lose and still be able to maintain your lifestyle. If you can lose half your portfolio and still be able to maintain your lifestyle in retirement, then that is your risk capacity. Your risk capacity and risk tolerance may not align, and that is why is important to understand both so that you do make a big mistake. Invest in your risk tolerance, but also within your risk capacity.
Understand your own risk by looking at historical downtrends.
This is something you can do by pulling up Google Finance or Yahoo Finance and type in your particular holdings. Look at how they performed in 2000-2002 and 2008. Not how they are performing today while the market is going up, but when the market went down. What was the impact? What is it small, big, or unchanged? By understanding the history, you understand how much risk that particular mutual fund, bond, or stock is carrying. You can also understand how long it took to get back to where your last highest point was. If it is more than your risk tolerance or risk capacity, now might be the best time to make a move, while the market is high.
Know which stage you are in.
There are three phases to investing for retirement. The accumulation phase, preservation phase, and the distribution phase. During your accumulation phase, you should time on your side. That means you shouldn’t plan on touching your investments for 15-25 years. If you are in your preservation phase, that means you are getting closer to retirement, and have close to enough assets to retire comfortably. The distribution phase means you are now distributing your assets for income. Based on each stage should determine how much risk you should take. Remember, the market only comes back to those who can wait.
What is your risk required?
The third risk is your risk required. How much risk do you need to take to maintain your lifestyle? If you are going to reach your destination on time, there is no need to speed and risk getting a speeding ticket and making you late. Understanding your risk required is done usually by understanding how much money you need in retirement to give you a comfortable amount of income with the least amount of worry. One way of doing this is doing a retirement income analysis. A retirement income analysis should help you determine how much you need to keep at risk to keep up with inflation and make sure you have the income to last the rest of your life.
Putting in place and understanding these six items will already put you in a less risky position and help protect you from the next big stock market crash. Whether it will happen tomorrow, next week, next month or next year is anyone’s guess. We don’t know how big the next one will be either. There are too many talking heads that think one way or another, the best thing you can do is to protect your own investments for your own retirement. Remember, losses hurt your more than gains help you, and don’t forget about Warren Buffets rule of investing.
Hi. Vince Oldre here again. I want to thank you for watching another video. We are in a position where the stock market is at all-time highs. Which is great, but it can also be very scary at the same time. We’re all wondering, when is that next stock market crash going to happen, and how much will it go down. We’re also wondering how much it will affect ourselves when it comes to our own retirement.
Now, what I’ve done here is I’ve listed six things that you can do to help yourself from the next stock market crash. And also avoid some of the things that we feel like we might be preventing ourselves from the next stock market crash, but we’ll end up finding that maybe we aren’t doing what we should be doing.
Number one is to have a warning system. What do you have in place that’s going to tell you that your funds are going down, and at what point they’re going to be in a spot that you’re not comfortable with? Sometimes you will get quarterly statements. If you just rely on your quarterly statements, you could be for a big surprise at the next quarter.
You might be watching on the news that the stock market might be going down, but you don’t think you’re that diversified. Or you think are very diversified, so you just don’t know what’s going to happen until you get that quarterly statement. That’s the exact thing not to do, is to wait for your quarterly statement. You need to have a warning system.
What we use is a thing called Wealthguard. We have a video that we’ll attach to this blog here, or this video, where you can watch what Wealthguard does. What we do with Wealthguard, is it helps monitor your 401ks, your IRAs, whatever retirement vehicles you want to attach to it, and it will give us a warning system when we lose more than what we’re comfortable losing. What we say is losses hurt you more than gains help you.
If you lose more than 50%, we need more than 100% gain to get back to break even. So losses hurt you more than gains help you. We want to make sure that we are protecting your losses by having a warning system. Again, if you don’t have a warning system like Wealthguard, or something that will warn you about the losses in your retirement, let us know and we can set you up with Wealthguard at no cost or obligation.
Number two is to diversify your investments. Sometimes we feel like we might be diversified when we’re in multiple different mutual funds. But what we find out, when we do a Morningstar report, is that most of your mutual funds all own very similar stocks or holdings. That means you’re really not that diversified. When we look at the historicals of all the different mutual funds, we might find that you might lose more than what you really want to lose.
Even though you might be in a 40/60 stock-bond mix, or a 60/40 stock-bond mix and you feel like it’s a rather conservative model, you might be in for a big surprise when the market decides to correct itself. Even the target date funds, when we had the big stock market crash in 2008, we found out that a lot of these target date funds, even the 2010 target date funds, lost over 20 to 25%. That’s significant. Probably a lot more than what you want to lose if you’re two years away from retirement.
So make sure you’re diversifying correctly. Not just in US stocks, but also in international; not just in stocks, but also bonds; not just in one mutual fund company, but in multiple mutual fund companies. But then do an analysis as far as what the holdings really are. Are they actually holding separate stocks? And by doing a Morningstar report, you will find that out.
If you can’t have access or if you don’t have access to a Morningstar report, we can do one for you. But otherwise, you can go to Morningstar and you can get one report done for you. I believe there’s a monthly fee if you want to subscribe to them if you want to.
The next thing is to not risk more than what you are willing to lose. What do I mean by that? I mean your risk capacity. Your risk capacity is how much can you lose and still maintain your lifestyle. If I can’t lose more than 25% of my portfolio, that means I don’t want to take risks with more than 25% of my portfolio. I can’t lose more than 25% to maintain my lifestyle. So understand your risk capacity.
The other one is your risk tolerance. Your risk tolerance is something different than your risk capacity. Your risk tolerance is more your emotional risk, and that’s by understanding if you get your quarterly statement in the mail, how would you feel. You don’t want to make irrational decisions when you get something in the mail. You can lose 25% and then you realize you lost 25%, and then you accidentally get out of the market.
A lot of people did that in 2008. What they were doing is they were thinking about how much money they had, how much it shrunk down to, and how many years that money is going to give them for income for the rest of their life. They looked at it as I had 30 years and it got shrunk down to 15 years. So don’t do that to yourself. Make sure you understand what your risk capacity is with your risk tolerance. But then also understand what your risk required is.
That means look at how much you need to risk to maintain your lifestyle. If you don’t need to go for the big 30 to 40% returns, why do that? Why are you going for 30, 40% returns when you’re taking 30 to 40% risks? If you just need an 8% return on average, shrink your risk down and just go for a little bit above the 8% and a little bit below the 8%, and you’ll average a better rate of return, at the same time as reducing your risk.
Lastly is know what stage you’re in. Knowing the stage you’re in means, are you in your preservation mode, your distribution mode, or your accumulation mode. Preservation mode is the mode in between or the stage in between accumulation and your distribution. Accumulation is where you’re accumulating your money and saving, and you have time on your side. You have 20 to 30 years to let the market go up and down. So there’s not a lot of things you have to worry about.
But your preservation is where you’re getting closer and closer to retirement. If you’re 10 years away, we try to reduce your risk so that you can hit your goals when you do decide to retire. And then your distribution phase or stage is where you now are distributing your money from your retirement plan. That’s where you’re taking that income out. A lot of times we don’t need a lot of risks. We just need enough risk to maintain our goals and keep up with inflation.
Those are six things you can do to make sure you reduce the stock market risk that you have and protect yourself from the next stock market crash. I believe there’s a lot of things you can do, but these six things; where you can have a warning system, diversify, understand your three risks, and knowing what stage you’re in is critical to helping protect you from the next stock market crash.
If you want our help with something like Wealthguard or to get a risk analysis with Morningstar please let us know by leaving us a message or by coming to our next event, and you can learn more about what we do. Just click on the events tab, and you can sign up for one of our next events or on the bottom of the screen you can click message, or leave us a message and we’ll get back to you shortly.
As always, I thank you for watching, and we’ll see you next time.