USA TODAY International Edition
5 tips for those who are risk-averse savers
Getting squeamish about a U.S. stock market that’s near record highs and far from cheap? You’re not alone.
Even financial planners who help Main Street investors save for retirement through a 401(k) or for their kids’ college with a 529 plan admit they’re nervous as stock prices keep climbing nearly nine years into the bull run.
“The market outlook is clear skies right now, which makes me a little nervous because clear skies doesn’t mean you can’t have a thunderstorm roll in quickly,” says Lew Altfest, president of New York-based Altfest Personal Wealth Management.
Protecting an investment portfolio from a financial storm, however, doesn’t mean you have to rip up a well-thoughtout plan or let a short-term downdraft worry you sick. That’s especially true if your goal is to sock away money for use in 10, 20 or 30 years, financial planners and wealth management pros say.
“We want to get our clients away from worrying about short-term market uncertainties, because there’s always a reason to be fearful,” explains Brad Bernstein, senior vice president at UBS Wealth Management Americas in Philadelphia. “Investors should stay focused on their financial goals, risk tolerance and investment time frame.”
Here are tips for investors who need to put aside money but want to stay away from risky investments or minimize losses if the market heads south:
❚ Don’t lose sight of long-term picture: What happens in the market tomorrow, next week or even next year really doesn’t matter for investors who don’t have to touch their savings for 10 years or more, Bernstein says.
If your financial plan, for example, is to save up enough for your pre schoolage son’s or daughter’s college tuition 12 to 15 years from now, you should have most of those savings dollars invested in stocks, no matter if the market swoons or soars, Bernstein explains. The same goes for money that’s targeting retirement in 2037 or 2047.
“Every account should be invested for its specific goals and objectives,” Bernstein says. “That perspective is critical for investment success.”
He notes that an investor who had the misfortune of buying at the top of the U.S. market in 2007 would still be up 65% today, which amounts to an annualized gain of more than 6%, despite the market losing more than half its value in the 2007 to 2009 bear. Similarly, an investor who got spooked out of the market at the start of 2016, when U.S. stocks cratered more than 10% in the year’s first six weeks, would have missed out on a gain of more than 40% since.
❚ Avoid an all-American portfolio: Sure, President Trump keeps pushing an “America first” agenda. But that doesn’t mean you should have all your cash riding on a U.S. stock market that is currently trading at a price-to-earnings ratio nearly 25% higher than the average P-E over the past 50 years, earningstracker Thomson Reuters says.
There are plenty of investment opportunities outside the U.S. where you can still get exposure to stocks but at cheaper prices relative to earnings.
If a market downturn strikes the U.S., it won’t necessarily drag down stocks in places such as Europe and Asia, which have lower valuations and economies still in earlier stages of their rebound cycles after the 2008 financial crisis, he says.
Stocks in Europe and Asia are trading at about 16 times expected earnings in the next four quarters, lower than the 18.2 price-to-earnings ratio of the Standard & Poor’s 500 stock index.
“Go international,” Altfest says, noting that it is a way to diversify and avoid a “U.S.-specific correction.”
❚ Trim stock holdings before the
next crisis: For example, if you have 70% of your portfolio invested in U.S. stocks, trim it back to, say, 50% of your holdings. That way if stocks overall go into a bear market, defined as a drop of 20% or more, your portfolio will suffer only half the losses, Altfest explains.
“Nobody I know can get out at the peak unless they are lucky,” Altfest says, adding investors don’t want to wait too long and sell out at the wrong time when stocks have already suffered a big drop.
❚ Protect your money from inflation: Inflation has been tame for years, and that’s a big reason why the Federal Reserve has been reluctant to raise historically low interest rates too quickly. But for an investor who still wants the stability and lower volatility of bonds in the event inflation does spike, Altfest recommends so-called Treasury Inflation Protected Securities, or TIPS.
Unlike traditional U.S. government bonds, the principal — or your initial investment — of a TIPS increases with inflation, which is measured by the Consumer Price Index, a metric used to assess the cost of everyday goods Americans purchase. “TIPS,” Altfest says, “don’t lose their principal value.”
❚ Take profits on big winners: Investors with big gains on high-flying technology stocks such as Apple, Google-parent Alphabet or Facebook might want to consider lightening up on these winners. But the key to this strategy is to stockpile the cash and be ready to deploy it opportunistically when the market is down 20% to 30%, Altfest says.
“Keep the cash out of the market until people are screaming at you to buy their shares so they can get out,” Altfest says, noting the shares likely will cost less when sellers are desperate.
Now’s the time for investors to analyze their 401(k) and other accounts to make sure they’re not taking more risk than they think, says Ron Carson, founder and CEO of Carson Group, an Omaha-based financial firm that advises clients with assets totaling $10 billion.
“When it comes to risk, most people think they are going only 5 miles per hour over the speed limit, but many are really going 50 miles per hour over,” Carson says.