Nobody knows what will send the stock market into a tailspin, or when that moment may be coming. This is the inherent risk that comes with investing.
But some investors are concerned that President-elect Donald J. Trump’s policy agenda — stiff tariffs, deep federal spending cuts, mass deportations of immigrants — could push the market over the edge, inflicting real damage to the investment portfolios they worked so hard to build.
When we asked New York Times readers to send us their money-related questions after the presidential election, these market concerns ranked high. Several asked what financial advisers are suggesting that people do to protect their savings, whether they’re earmarked for retirement or college tuition. Another told us she was considering selling all of her stocks in January. “Is it wise to do that?” she wondered.
The president-elect does pay close attention to the stock market and seems to view its performance as a reflection of his own. Some experts have said they expect the market’s influence to act as a check on Mr. Trump’s policy decisions.
But when there is uncertainty, we tend to focus on what we can control, and our exposure to the stock market is one of those things. Now is as good a time as any to ensure your portfolio is well positioned to weather any market conditions, regardless of who is occupying the White House.
But it may also help to consider what happened to investors when they did act on their fears during periods of market volatility.
Considering the Past
Assuming your mix of stock and bonds is appropriate for your personal situation and goals — which includes your ability to stomach market drops — doing nothing is usually the wisest course of (in)action. After all, we know that past results do not foretell future market behavior, but they can inform ours.
Let’s rewind to the coronavirus pandemic, when most of the economy grinded to a halt — a situation that easily qualified as a “this time is different” moment. The market reacted in kind: The S&P 500 plunged 34 percent in late March 2020 after hitting a high on Feb. 19.
Vanguard studied what happened to thousands of its retail investors who panicked during that moment, just as the pandemic unfolded. Fewer than 1 percent of those people fled stocks for cash, but of those who did, the vast majority, or 86 percent, earned lower returns during the three and a half months that followed than if they had just remained invested, according to its analysis, which looked at the period from Feb. 19 to May 31, 2020. That included the 34 percent market plunge, and subsequent 36 percent rise, which these investors missed.
Ultimately, the S&P 500 gained 16 percent by the end of that first pandemic year, and soared more than 25 percent in 2021.
Indeed, the difficulty that follows fear-based selling is figuring out when exactly it is “safe” to get back into the water. Most people end up waiting too long, similar to the investors Vanguard studied, and miss out when the market bounces back.
That can cost investors dearly, even those who eventually return.
Consider three hypothetical retirees with identical $500,000 portfolios, consisting of 60 percent stock funds and 40 percent bonds — a fairly common allocation for Vanguard retirees heading into 2020.
Let’s say each of them reacted differently to the pandemic plunge. Here’s what their portfolios would have looked like on Oct. 31, 2024, assuming they reinvested all dividends:
“The costs of panicking to cash in 2020 would have been significant — generating lost wealth well into the six figures,” said Andy Reed, head of investor behavior research in Vanguard’s investment strategy group. He ran the numbers using its market hindsight tool, which lets investors run portfolio simulations, using actual market events, that illustrate what would happen if they were to move to cash or reinvest.
“We find people tend to be out of the market longer than they anticipated,” he added.
Selling can feel like the right thing to do in moments of uncertainty. And if you do need the money in the short term — for college tuition in a few years, for example — much of it probably shouldn’t be invested in the markets anyway.
Revisit Your Plan
There are actions you can and should take. Check your investment portfolio to ensure that the mix of stock and bonds is where you expect it to be.
“You may have originally set up a thoughtful 60/40 portfolio,” Mr. Reed said, referring to the percentage of money held in stock and bonds, “but because of market movements it may now be 80/20.”
Suddenly, you’re in a much riskier position than you had thought, even more so since you’re probably closer to needing the money than when you last checked your allocation.
If you’re working with a financial planner on an ongoing basis or using a robo-adviser, either one should be regularly rebalancing your retirement portfolio back to its original stock and bond mix. But the start of a new year is a good excuse to take a fresh look and consult with a professional (fiduciary only) adviser if you have questions about whether you’re too exposed to stocks.
Trimming back your exposure isn’t your only option, either. Milo Benningfield, a certified financial planner in San Francisco, suggested creating a cash cushion — a minimum of one year’s worth of expenses, if you possibly can — to serve as a financial and emotional buffer between you and the fluctuating markets. Having more cash outside the retirement portfolio, he said, enables retirees to take more risk inside the portfolio.
“In general, we’re fans of ample cash reserves, at all times, since they’re a lot more effective for insulating retiree finances than trying to dial back stocks,” he said.
Retirees who have a lot riding on the markets’ performing well in order to meet their goals might want to consider purchasing an immediate annuity, where you make a lump-sum payment to an insurance company in exchange for a guaranteed stream of lifetime income.
“There are ways to create diverse income streams that make a plan much stronger,” Mr. Benningfield said, “both financially and psychologically.”
Families who are invested in college savings plans like 529s should check their investments, too. Target-enrollment mutual funds are often used in those accounts — a mix of stock and bonds that automatically becomes more conservative as enrollment day approaches — but their risk levels can vary.
A 12-year-old aiming to enter college in 2030 would have 42.6 percent in stocks if the money were invested in Vanguard’s 2030 target enrollment fund, but 52.5 percent in stocks at T. Rowe Price.
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