Deep down inside, you knew this was going to happen. You knew this stock market wouldn’t last forever. And just when we get more great news about the economy, the market comes tumbling down and loses trillions of dollars in market value in a matter of days.

The question is … now what? How should you position, and protect your investments?

This has been the most extraordinary bull market runs in history. Since its low in March of 2009, The Dow has gone up nearly 20,000 points. But is this party finally over? Nobody can tell you what’s next for the stock market. But everyone seems to agree that volatility is here to stay.

And if you’re retired, or even nearing retirement, volatility is not your friend. This is no time for complacency! Volatility can be dangerous when you’re retired if you don’t have the right plan in place. However, volatility is a regular occurrence in the stock market, and we will have volatility. Therefore, you need a plan that can reduce the impact of that volatility on your retirement security.

The decisions you make could determine whether you retire according to plan. Or if you’re forced to work much longer than you ever wanted.

Today, I reveal some sound and practical advice on how to position and protect your investments in a turbulent stock market.

First, a little perspective perspective. This turbulence started in early February and it has been very volatile. Let’s be clear on something, though: from the market high in late January to the low point, we have seen a market correction. Understand that correction means the market went down between 10 and 20 percent. From the high point to the low, the market has gone down a little less than 12 percent. So, it’s barely a correction. It certainly does not approach bear market status, which would be a 20 percent turndown in the market. It has been over 2 years since we’ve last seen a turndown more than 10 percent.

I think we have to realize that market volatility is the way of the markets, and it has been historically very, very low. So, there’s a couple of things going on here. Don’t get me wrong, volatility is real and it is substantial of what we’ve seen in the past 6-7 weeks. But I also don’t want to go overboard on this.

Two things have happened that are causing individuals to become concerned about volatility.

  1. We were lulled to sleep by record stability. Last year – 2017 – was the second-lowest year of volatility on record, according to Investment News. It was an anomaly of stability and we were confident that market stability at that level would not continue.
  1. On top of that, the market hit all-new highs. Realize that the Dow is pushing 25,000 points. When the Dow is around 25,000, 150 or 200-point movement in a day is not a volatile day with today’s market. A 1 percent movement is 240 points. You should always think in terms of percentages, not points.

This combination of great market returns with record level of stability in 2017 made us feel safe going into 2018. As volatility comes back, it is even more important that you position and protect your investments.


The biggest issue of not having a balanced & diversified portfolio is RISK.

If you don’t have a portfolio that matches your tolerance for risk, you could lose a significant portion of your life’s savings. And it could be too late to do anything about it when that happens.

We talk a lot about downside risks because it is an issue that nearly every prospective client we see has. They show up to the first meeting with a handful of scattered investments, but there’s no rhyme or reason as to why they are holding those investments. “Well, we just want growth.” That’s just not enough. Why do you have this mutual fund or that mutual fund? Or why do you have an index fund? Has that really been communicated to you? The bottom line is that most people who come into my office are taking more risk than they know, or more risk than they need to, at this stage of their life.

If you talk to someone who lost their shirt in any of the previous bear markets, they could have prevented much of these losses by having a more balanced, risk appropriate portfolio.

Now, I know you may be thinking, “Well, Jim, when we talk about risk, I’ve lost it before.” And that may be true, but that was 9 years ago. The bear market of the Great Recession ended over 9 years ago – March 9, 2009 was the end. Since then, we’ve been on a historic run. But, where are you in life since then? You may have experienced it before and had time to recover, but that was 9 years ago. If you are on the cusp of retirement now, you weren’t on the cusp of retirement at that time. Or, if you’re in the first 5 years of your retirement, you weren’t retired 9 years ago. It makes a difference. How devastating would that type of market loss be today?

And the reality is, stocks are expensive. In the short term, we can’t predict what is going to happen, but in the long term, there’s some real concerns here.


Different events that would trigger a need to rebalance your investment portfolio now:
  • A major shift in the stock market, up or down
  • Your age. (As you get older, your appetite for risk will change.)
  • Interest rates. (Record-low interest rates have forced many investors into riskier assets.)
  • A change in the tax law
  • A change with inflation
  • You receive an inheritance
  • You lose your job

Now, no matter what is going on with the economy and your life, you should always be having regular meetings with your advisor to rebalance your portfolio. We can’t time the market, but at the same time, we should be prudent and take advantage of opportunities.


Don’t simplify the solution.

Don’t think you can oversimplify rebalancing your portfolio using some general rule of thumb. I’m not a fan of automatic rebalancing of a portfolio, especially more than once per year. Everyone has different life situations, and a number not customized to you likely isn’t accurate.

This is also a very different period of time. We are currently looking at the 2nd longest bull market run, plus record low interest rates, all-time high national debt, challenges with social security funding, and tremendous world unrest. Is your tolerance for the risk the same as a million other people? NO! So, look at what you need for income, when you need it, and what your tolerance for risk is. It will be different for every person.


Understand the how and why of rebalancing.

When you take a look at your portfolio and re-structure it, there are 3 different types and reasons you do that.

  1. Disciplined Rebalancing – this is when monthly, quarterly, or annually, there is an automatic rebalance. As I mentioned earlier, I’m not a fan of that. I’m certainly not a fan of monthly or quarterly rebalancing. It’s way too frequent. When you rebalance too frequently, you choke off growth, in my opinion. The big thing is, that you or a financial advisor should be looking at your asset allocation regularly.
  2. Trigger Based Rebalancing – when certain “triggers” tell you it’s time to rebalance, like when the stock market is breaking record after record.
  3. Life-Stage Based Rebalancing – different stages or certain events in life (divorce or loss of spouse) can cause for the need for you to reduce or increase your risk, generate more income, etc.

Touching on the previous point of oversimplification, understand that the hold “your age in bonds (or fixed holdings)” rule is outdated. It’s probably not going to work in this market, and it is way too general for specific advice.

Interest rates are at record lows and don’t look to be going up too much. This means your bonds won’t be yielding much. There is a need to re-balance based upon your holdings in traditional bonds. The reason people typically buy bonds is to hedge volatility and risk in their portfolio. When the stock market is volatile, people typically run to the safety of bonds. The problem is that you’re adding an asset class that is doomed to failure in the next 10-15 years, in my opinion, because interest rates are so low. There are other ways to hedge your portfolio and add more balance in than traditional U.S. bonds.


Don’t forget about tax diversification and tax strategy.

If you can reduce the tax impact, that creates less tax drag on the investment. Therefore, if your returns are less, but you can reduce the tax effect somewhat, than you do make more money. We call that tax alpha.

What is tax diversification? It means that you’ve got different pots of money based on how they’re taxed, and you manage that. You manage that in terms of tax benefits that you may get in terms of funding those things today and what the tax consequences are on those buckets of money tomorrow. There are basically 3 tax categories to diversify in:

  1. Income Tax Free Holdings – Roth IRA, interest from municipal bonds, and certain types of life insurance.
  2. Tax Deferred – 401(k), Traditional IRA, 403(b), real estate, or hard assets. This is where you save money upfront, but most, if not all, of that money is taxed when you take it out.
  3. Taxed Always – brokerage accounts, checking and savings accounts. You pay tax on the dividends, interest, or capital gains.

Tax diversification and considering Roth conversions when you have low tax brackets could be something to really watch.

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