401(k) adviser: What to do with your retirement assets in a bear market
The first half of 2022 has been miserable for just about everyone’s retirement investments.
Not only have U.S. stocks dropped into bear market territory, but the bond market has experienced its worst start to a year since they started keeping modern records in the mid-1970s.
My advice: think long-term and use this market decline to your advantage.
First, let’s do a reality check. We’re currently experiencing our fourth bear market since 2000, with the S&P 500 Index down just over 20% from its peak in early January.
The previous 11 bear markets since World War II saw the S&P 500 Index fall on average 33%, with the worst, a decline of 58%, coming during the Great Recession of 2008-2009. The average recovery period, defined as the period of time from the market low to a new high, for the last 11 bear markets was 27 months.
Because stock and bond market prices are constantly discounting expected future events, they started moving down in January anticipating that growing inflationary pressures would force the Federal Reserve to raise rates and economic growth would slow. Russia’s invasion of Ukraine in late February exacerbated these pressures.
With three rate hikes now in the books for 2022 and more expected, higher short-term interest rates are priced into the current market. Predicting when the next bull market will begin is tricky because it requires you to correctly anticipate how high rates will go, when inflation pressures abate, and the impact inflation will have on future corporate earnings.
As for investment strategy, the first question you need to answer is about your time frame for needing the money you have invested. If you need any of it in the next 12 months, I recommend selling that amount immediately.
If your time frame is longer, there’s a good chance you’ll be better off hanging on. If you’re investing via a 401(k) or 403(b) plan, your regular bi-monthly contributions are “dollar-cost-averaging” your cost basis lower which will help boost returns once the rebound occurs.
If you’ve read this column before, you know I’m a big proponent of building and maintaining a diversified portfolio for the long term. If you came into the year with a portfolio diversified between stocks, bonds, and hard assets, you’re definitely feeling pain, but not as much as most. Now, rebalancing your portfolio is the smart play. That…