07 Aug I’m nervous. Should I get out of the stock market?
Q. After the past few weeks, I’m reconsidering my asset allocation. I think I’m too heavily invested in stocks. Should I get out?
A. We’re glad you’re asking, but don’t do anything rash.
It’s been a couple of ugly weeks, but the S&P 500 is still up nearly 15 percent this year.
You need to think long term.
First consider your risk tolerance. You’re saying you think you may be too heavily invested in stocks, but we’re guessing you created your asset allocation – how much to allot to different kinds of stocks and bonds – thinking your emotions could handle the ups and downs.
If you’re feeling nervous, that’s a sign that you may have chosen the wrong allocation for you.
Next consider your time horizon, which is how long into the future you will need the money.
If you have 10 or 20 years, your portfolio will have time to recover its losses before you need it.
If you need your money in less than five years, you shouldn’t have all your money in stocks anyway. Instead, financial advisors suggest you use a bucket system. The first bucket would have money you’d need in the next year, kept in a safe investment such as a money market fund. The second bucket is money you’ll need over the next few years, and that could be invested in Certificates of Deposit or another vehicle that won’t risk your principal. The last bucket should be invested for long-term growth and income in a mix of stocks and bonds.
So should you get out now? Probably not. Studies show that investors who take money out of the market because of a few difficult days have a hard time deciding when to reinvest – and they often miss the upswings that follow. That could have long-term damage to your portfolio.
Instead, if you believe in your asset allocation – and you don’t need this money soon – you should rebalance your portfolio at least twice a year. If the underlying investments in each asset class have strayed from your initial allocation, now could be a good time to get back to your original plan. Learn more about how to rebalance here.
It’s also a good time, if you have funds in taxable accounts, to sell losing stocks. You could use the losses to offset up to $3,000 of ordinary income when you file your tax return, or you can carry over the loss to offset future capital gains.
Finally, if you’re not sure your money is in the right place, consider hiring a fee-only financial advisor. This pro will look not only at your portfolio, but your overall financial plan, and make recommendations you can accept or reject. You could opt for a one-time plan or an ongoing relationship with this advisor.
Because you’re nervous, it seems you could use an objective second opinion. Good luck.
Email your questions to moc.p1582089553leHye1582089553noMJN1582089553@ksA1582089553.
This story was originally published in August 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.