Importance of Diversification of Risk for Your Future

The last thing you want to hear in your retirement years about your accounts is…

“The stock market dropped yesterday …”

If you checked the stock market yesterday morning, you – like others saving for retirement – probably panicked noting that the Dow dropped 1,000 points at the open before ending the day down nearly 600 points. This marked Dow’s largest point loss ever during a trading day.

You, like others saving for retirement, may have immediately thought about touching your retirements savings. Many are worried about the impact the Dow’s epic drop has on your 401 (K) or Roth IRA accounts. The volatility of the market follows the recent attempts of China’s government to stabilize its government and the importance of diversification of risk in investments should not be taken lightly.

For those saving for retirement – especially baby boomers, 35{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} of whom invest heavily in the stock market – yesterday was frightening. Nobody wants to see their retirement funds drained due to market instability. Because our economy is recently recovering from the 2008 crash, unease is an appropriate reaction to such a monumental drop. However, before you touch your retirement accounts, you should know exactly what yesterday’s market dip means for you and your future.

How Much of Your Retirement Should You Actually Invest In Stocks?

Retirement investment is often a tricky investment because it is such a long-term game. The first thing you should know about your retirement fund is that you should be keeping an appropriate share in your stocks and gradually moving them to assets that pose less of a risk the older you get. This way, you can weather unexpected market turns like yesterday’s.

This does NOT mean; however, that you should immediately rush to switch your method of retirement savings. Keeping on your current course of retirement saving could help you recover better than those who make rash decisions based on market panic.

Despite the drastic drop yesterday, stocks are already bouncing back. We aren’t yet in a “bear market”, meaning that stocks have not reached the critical drop point of over 20{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439}. In fact, CNN Money estimates that the Dow alone is at 13{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439}, which means our market isn’t in dire straights. According to the S&P 500 stock index, yesterday’s drop only wiped out about 11{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} of the S&P 500’s 220{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} gains.

While yesterday was concerning, there is no need to panic and begin finding alternate methods of retirement investing. This is an excellent time to check your assets and to check in with a trusted financial adviser.

Now, you may be wondering after the Dow’s drop how much of your funds you should be investing in stocks. The only honest way for us to answer this question is to tell you to speak to a trusted financial adviser, who will be able to analyze your assets.

A good rule of thumb for investing in your retirement funds is this: the closer you get to retiring, you should begin moving percentages of your funds from stock investing to assets that pose less of a risk.

Diversification of risk, not Liquidation

We cannot stress enough the importance of speaking to your financial adviser before making any decisions concerning your retirement savings. If you make the wrong decision, you may find yourself ill-prepared for your later years.

One of the initial reactions caused by yesterday’s panic was to liquidate and exit the stock market. While you should ultimately, do what is right for you and your financial situation, you should also keep in mind that the market is going through a reparative process right now. In general, no market will go straight up. Does this mean our bull market is ending? Not necessarily. The market is unpredictable, but many market analysts predict that ours will remain strong for a while.

So what does this mean for those who are still worried about investing their future in the stock market?

In general, the diversification of risk is your best bet. This means investing in a multitude of different markets. Bonds, annuities and life insurance are all investment alternatives to the stock market that could help you diversify your retirement portfolio.

Bottom Line

It is only natural that a scare like yesterday’s makes you uneasy about the stability of your future savings. However, before you do anything with your retirement accounts, we strongly encourage you to speak to a trusted financial adviser.

Before making any financial decisions – particularly those that heavily impact your future – it is important to educate yourself on your options. We understand that yesterday’s downturn was frightening and may have you worried about the outcome of your future. We also understand that making an uninformed decision is just as frightening of a risk to your retirement as market drops. Give us a call today to find out exactly what the Dow drop means for your retirement savings and how we can help.