Although the stock market is currently on an upward path, it’s likely that a rise in infections could lead the stock market to sink suddenly as the second wave of the virus begins winding its way through the population. We have very little we can do about the pandemic other than observe all of the safety measures in place to keep us safe. But is there a way you can help safeguard your portfolio?
These five tried-and-true investment strategies are designed to work whether the market is rising or falling fast.
- Rebalance Your Portfolio – If you haven’t spoken with your financial advisor lately, you may want to help minimize portfolio risk by buying or selling assets so your portfolio reflects your original asset allocation or risk level. In other words, if you originally set your portfolio to reflect 50 percent stocks and 50 percent bonds, if the stocks you hold performed well during the period, they might comprise 70 percent of your portfolio for example. The idea then would be to sell 20 percent of the stocks and buy bonds to bring your original investment mix to its desired amount.
- Consider Dollar-Cost Averaging – If you’re looking to cut risk, consider investing a consistent dollar amount over a period. This investment discipline takes the emotional component out of investing if you’re putting the same total in your account each month. It also helps prevent bad timing by buying investments when they are a high cost and selling when their price is falling.
- Review Your Risk Tolerance – If you haven’t discussed your risk tolerance with your financial advisor, now might be a good time. You may have been able to tolerate a higher degree of risk during recent years when the market kept climbing. But how did you feel when the market tanked recently before its recent bounce back?
- Figure Your Retirement Age — Are you retired now, or expecting to retire in two years or so? How you handle stock market volatility greatly depends on where you are in your life. Typically, those in retirement hold a conservative investment portfolio because they are living off their security holdings. But someone with five to 10 years to retire, might be comfortable with a higher percentage of stocks since they are likely to be able to rebound from a market downturn that occurs before they’re ready to leave the office behind.
- Count Your Cash – A good rule-of-thumb is to save three to six months of your income in cash or “cash equivalents” that can be easily tapped in an emergency such as a sudden job loss. Unfortunately, this rule becomes even more important during the uncertainty of a pandemic. If you don’t have that much cash available, consider deducting a specific dollar amount from your paycheck and automatically deposit it into a savings account.
Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment.