Recent headlines underscore the fragility of the stock market and, along with it, the ability for many investors to make reasonable decisions about their retirement readiness. Many who recall the violent reaction their portfolios had in the Dot Com Bubble and the Financial Crisis would prefer to avoid the next downturn.
It’s worth noting that crystal balls are in short supply, and we cannot predict the immediate future. What we do have in our arsenal is the ability to review our game plan to avoid making short-term decisions that impact our long-term outcomes.
These are four things investors should consider during times of uncertainty.
1. Has your time horizon changed?
Our portfolios should reflect the timing of distributions, and the duration of your portfolio should take this need into account — particularly if there is a need for liquidity within the next three to five years. This should sound familiar because the bank run at Silicon Valley Bank stemmed from the lack of liquidity, as their portfolio of bonds could not accommodate the withdrawal demands of depositors. Your portfolio is akin to a bank balance sheet; you are the depositor, and there should be a viable distribution strategy that mirrors your retirement schedule.
2. Has your risk tolerance changed?
The banks will begin to reassess their penchant for taking risks, which will likely reduce their willingness to take chances. In turn, loan growth may suffer in the months ahead as the credit requirements become more onerous. Investors should follow suit and reconsider the high beta assets that outperform in a less rigorous environment. The question should not be whether to own stocks or bonds, but which securities have the best chance for success in a recessionary high-interest-rate environment.
3. Do you have sufficient reserves?
During times of crisis, it’s always a good idea to have access to readily available resources. One of the problems facing the credit markets is that bonds don’t accurately reflect the true market value, because a sale hasn’t taken place that would establish a price. Your portfolio may have assets that can be sold at a price that is below what it might be worth in the future due to the current set of circumstances. Adequate reserves buy you time while your underperforming holdings have an opportunity to recover.
4. Have you considered the available alternatives?
Our interest rate environment has changed and that has sent shock waves throughout the banking system. For instance, why would depositors remain in a bank that pays 1% when they can receive 5% through another opportunity? The reason we own bonds is because they are less volatile than the stock market, albeit with a lower ceiling. Fortunately for savers, that ceiling just got a few feet higher. Instead of owning defensive stocks or bonds, investors may get 4% to 5% in a money market fund or a Treasury bill with little to no volatility.
We can all learn something from the recent banking crisis and apply these lessons to our own affairs. Soon-to-be retirees would be wise to review their portfolios and determine if they meet the needs of the day when rates are higher, corporate profits are decelerating and volatility doesn’t seem to be going away. This isn’t the time to panic; instead, it’s a chance to reduce your anxiety.
— By Ivory Johnson, certified financial planner and founder of Delancey Wealth Management. Johnson is also a member of the CNBC Financial Advisor Council.