If you keep up with the news, it’s pretty hard to ignore all the talk about an impending recession. And even if you’ve somehow managed to ignore that, the record inflation and tanking investment portfolios have probably caught your attention. This can be stressful for people of all ages, and many are worried about how this will affect their ability to retire when they want.
No one likes to lose money, so it’s a totally natural instinct to want to pull your money out of the market right now. But that could be a huge mistake.
Focus on the big picture
It’s important not to make any rash decisions with your retirement savings right now because they could have far-reaching consequences. Selling investments that have taken a dip to prevent them from sinking further could turn a temporary loss into a permanent one. Whereas if you’d held onto your investments, they might have recovered in time.
If you take the more drastic step of pulling your money out of your retirement account altogether to keep it in cash, you could face costly tax penalties today. You’re also making it much more difficult to save for retirement going forward.
It’s nearly impossible for most people to save as much as they need for retirement on their own. They need investment earnings to help them, and they can only get these by investing. Your earlier contributions actually matter the most because they’re usually the ones that generate the most earnings over time. When you start later, you’ll have to rely more upon your personal contributions.
The stock market has its ups and downs, but over the long term, it usually does pretty well. You might think it’s a bad thing to invest more when share prices are down, but this can actually be a smart move. You’ll get more shares of a stock or index fund than you would when times are good and prices are higher, and when the market recovers, these shares could make you a handsome profit.
But don’t ignore obvious problems
For most people, the best thing to do in a recession is to stay the course. Trust that you’ve made smart investments and don’t check your portfolio too often if you believe it will tempt you into emotional decision making. But there are situations in which it makes sense to take a hard look at your portfolio.
If all your money is in a handful of stocks, for example, that’s a major red flag. If one does poorly, it’s going to have a much bigger effect on your portfolio than if you had hundreds of stocks and a few of them dipped. At a minimum, spread your money equally between 25 different stocks.
You might also want to make some changes if all your investments are in the same industry, like tech companies. When that industry is down, your portfolio could take a heavy hit, even if you own dozens of different stocks within the industry.
Think about your risk tolerance as well. If you’ve got all your money in stocks and you’re on the verge of retirement, you’d be right to be worried. A general rule for managing your exposure to stocks is to keep 110% of your invested money minus your age invested in stocks. So if you’re 40, you’d have 70% invested in stocks and the remainder in bonds. If you’re 50, you’d have 60% in stocks, and so on.
But once you have a portfolio you’re comfortable with, step back and don’t get too worked up over the daily ups and downs. Unless you plan to retire really soon, these shouldn’t affect you over the long term anyway. Recessions and periods of economic uncertainty have happened many times in the past. People have still managed to successfully invest through them and retire comfortably, and you can too.