5 Reminders for Retirement Savers in a Bull Market
Not many people would have believed you in 2009 if you'd told them the markets would break all-time record highs again in a few short years. But with the Dow clearly past the previous high set in 2007, we can't help but accept that the unthinkable has become reality. But that doesn't mean we should forget the lessons of the financial crisis, because most of the investment risks are still there. Here are a few investment reminders for the bull market:
Don't increase portfolio risk. More and more people are coming up with reasons to own more stocks these days, likely influenced by the recent strong market performance. (Remember all those suggestions to reduce stock exposure a few short years ago when the market was valued at half the current levels? Where are they now?) You may believe you have a very logical reason to own more equities now, but these reasons won't be tested until the next bear market comes along. Buying high and selling low often involves buying the opposite of what seems to make perfect sense at the time.
Don't exit the stock market either. Prices can still go higher, so keep your market exposure. Don't sell just because it feels like the market is overvalued. If you have new funds to invest, add to underperforming asset classes to get back to your asset allocation. What's important is to maintain your risks in a bull market and stay the course.
Make a mental note of your investment gains. Let this feeling of strong investment performance sink in. I sincerely hope we won't get another 50 percent drop in the markets ever again, but that's probably wishful thinking. The equity market will eventually get slammed by bad news, and everybody will want to run for the hills. But those who remember the good times will have a better chance at not cashing out during market crashes. The markets have been good to your retirement funds. Celebrate a little so you can remember this run better. You'll need it when times get tough.
Don't overspend your earnings. Asset prices won't continue shooting upwards at this trajectory forever. It's all too easy to assume that recent events will persist into the future, but resist the temptation to spend as if things are always going to be rosy. The market could turn at any moment, and you'll want to keep your gains so compound growth can work its magic.
If possible, save even more. Let's face it. Saving more money is hard, especially when you need to increase your income or reduce expenses to do it. The markets flying high might be the push you need to sacrifice a bit more to add to the investing pots.
The future is impossible to predict, but there are many ways to guarantee bad portfolio returns. Come up with an investment plan that you can stick to, tune out the noise no matter what the markets are doing and stay the course. You'll be glad decades later.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.
