Thursday, June 30, 2016

Amid Brexit Turmoil, Lessons From Past Market Downturns

Uncertainty is the enemy of the stock market, and Brexit has thrown off plenty of it.

But it’s just the latest in a line of big, scary threats toward this seven-year bull market, and the third in a year’s time. The correction last August kicked things off, and investors had little time to catch their breath before turbulence in China sent them through another plunge at the start of the year, followed by Brexit.

You’d think we’d have learned our lesson by now — the lesson, of course, being not to panic. But this is money we’re talking about, and the idea of losing it can quickly cause even a level-headed investor to spiral into an emotional reaction. And the concern isn’t totally unfounded: This is the third-longest bull market in history, and the tides are going to turn at some point.

Yet the post-Brexit vote market has already started to rebound, recovering much of the $3 trillion in global stock losses in under a week. Even the best economists don’t know what the future holds, but in this case, the past may be more important. Here, five things we know from past market downturns that can help long-term investors weather the Brexit fallout, whatever it may be.

1. Simply staying in the game can be enough

You don’t have to be a Warren Buffett wannabe to survive in a rocky market. Sometimes, the best thing you can do is ride it out. Lucky for us, the ride isn’t always a long one: The best stock market days often occur within weeks of the worst, and sticking around pays off.

Missing out on the 10 best days with an initial investment of $10,000 would’ve cut an investor’s return nearly in half between 1996 and 2015, a difference of more than $24,000, according to JP Morgan Asset Management’s 2016 Guide to Retirement.

If you dial down to just the recession, which Fidelity Investments did in September 2010, you get similarly striking numbers: Investors who stayed the course between Sept. 20, 2008, and March 31, 2010 — despite some scary numbers coming out of their retirement accounts — were rewarded with an average 21.8% increase in account balances.

2. Unless it’s time to start backing out

Then again, you have to be in touch with your risk tolerance and your goals. Many people in or near retirement were stunned by the recession; those hit the hardest had portfolios with too much exposure to stock.

If the market were to begin a longer-term drop today, baby boomers could be faced with a similar situation. Fidelity says 27% of people age 55 to 59 have stock allocations at least 10 percentage points higher than recommended, and 10% have all of their 401(k) assets in stock.

As you near retirement, your goals should shift: Your priority becomes protecting that money, which means taking less risk. That doesn’t mean you can’t continue to grow it, but you should do so in a more conservative way, balancing out a 50% to 60% stock allocation with fixed-income investments.

3. Rebalancing is recommended for a reason

At least some of those out-of-whack stock allocations are likely the result of this bull market, which may have charged forward with your equity allocation, throwing your portfolio further toward stocks than you’d prefer.

Rebalancing aims to prevent that from happening: A portfolio made up of 60% stocks and 40% bonds that was never rebalanced between 1926 and 2009 would’ve ended up with a final stock weighting of 98%, according to Vanguard calculations.

When you rebalance, you typically sell some of your investments that have done well, putting that money toward those that haven’t. To be clear, now is probably not the time to do this, but it’s a good practice in general and it can keep you out of hot water if you’re close to retirement. Vanguard recommends that investors assess their accounts for a need to rebalance annually or semiannually, and act when their allocation strays out of line by more than 5%.

If that doesn’t sound like something you’ll keep up with, there are alternatives. In a 401(k), you might look at a target-date fund, which rebalances to take less risk as you age. Elsewhere, you could house your account at a robo-advisor; most of these computer-driven portfolio managers automatically rebalance for you.

»MORE: Robo-advisors help you stay calm when markets aren’t

4. There are opportunities in down periods

No investing article is complete without at least two mentions of Buffett, so here’s the second to round this one out, in the form of one of his most famous quotes, said in 2008: “You want to be fearful when others are greedy, and greedy when others are fearful.” Others are indeed fearful right now, and the stock slide could pay off for long-term investors.

That doesn’t mean the average retirement investor should start picking individual stocks that look like Brexit bargains. But many of the people in this group should be dollar-cost averaging, which means investing a set amount of money on a regular basis. When the market is down, that set amount of money buys you more.

And if you have extra money on the sidelines, now may be the time to put it to work. That could mean dabbling in individual stocks, if you’ve had your eye on any companies that seem to be on sale post-Brexit vote, but it might also be simply plowing a bit more money into the funds you already own while their value is down.

5. Brexit could actually save you money

The stock market should be for long-term investments, which means you should not be concerned about day-to-day fluctuations. In fact, if you want to block investing sites on your browser — with the exception of, um, this one — and keep your TV tuned exclusively to Bravo for the near future, we’re behind you.

But this short-term turmoil could actually save you money in some ways: Mortgage rates were in the 6% range before the 2008 market crash; they began dropping shortly after and have been in the 3% to 4% range ever since. We’ve already seen a mortgage rate change come out of Brexit: Though they’re currently headed back up, 30-year rates tumbled to a near-record low following the vote.

If the uncertainty continues, the Federal Reserve is unlikely to raise rates anytime soon — bad for your savings, but good for your spending, especially if you’re in the market for a home or auto loan, or if you’re carrying credit card debt. Which brings this back around to the idea of opportunities during down markets: Putting any money you save on debt interest into your retirement account probably isn’t a bad idea.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

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