In the event of equity market decline, where is the safest place to put my retirement investments where I will experience the best returns?
If (or really, when) the equity markets decline, the best place for your investments is the equity market! Once it's dropped, stocks are on sale so buy them! Long-term investors - which you should be if you're investing in the stock market - stay invested (at their risk tolerance), even in the face of a market correction or bear market. Re-balancing into the market is a great way to "buy low" and "sell high"!
Your questions leads me to think, perhaps incorrectly, that you're nervous about your current holdings. If that's true, I'd encourage you to determine whether your investment allocation reflects your risk tolerance, especially in light of the dramatic increase in the markets over the last 15 months. If your allocation matches your tolerance for risk, sit tight and re-balance periodically to either capture gains (if the market increases) or buy shares on sale (if the market declines). If your current allocation is too risky for your risk tolerance, re-balance to the proper allocation today. I recommend this not because you or I can predict the future market moves, but because your portfolio doesn't match your profile.
Trying to time the market is a losers game. Just don't play! Find the right portfolio mix for you and stay the course!
Typically, a portfolio of bond funds is an excellent option to help compensate for an equity market decline for two reasons:
- Many investors will sell equities to buy bonds in a down market
- Bonds issue interest payouts regardless of price value
For these reasons, we recommend a balanced portfolio with allocations between bond and equity ETFs based on your goals and time horizon. The portfolio can be re-balanced automatically to help minimize risk. The closer you get to retirement, the more your portfolio can be allocated toward bond funds to help reduce potential downside risk.
Historically speaking, the bond markets are where investors run for "safety" when equity markets decline. However, don't get caught making the same mistake so many people do and start liquidating your portfolio in the event of a market decline. This violates the first principle of investing - buy low, sell high. Down markets are great opportunities to reposition your portfolio and take advantage of underpriced asset classes. Warren Buffett made an excellent statement on this in a 2008 op-ed piece he wrote for the New York Times: "Be fearful when others are greedy, and greedy when others are fearful." In terms of putting this into practice long-term, however, your best bets are to remain diversified across both asset classes and sectors, rebalance once or twice a year or as need be (e.g. in crazy markets), keep your investment costs low, and then just be patient and steadfast in your strategy. Also, sit down with your adviser and do some stress testing of your portfolio. Have them run it through all sorts of different possible scenarios we could see like long bear markets or long periods of volatility and see how this impacts your likelihood of success over the lifetime of your plan considering what goals and specific needs you are working towards. That will give you the most powerful ammo in deciding if you need to reposition your portfolio, whether that's assuming less risk, staying where you are at, or even perhaps taking on more risk. Try to keep the larger perspective in focus versus worrying about each individual holding and where to put it if the market tanks tomorrow as that part is far more out of your control than sticking to a long-term plan.
Great question. The short answer is likely shifting assets during a correction the damage has been done. Typically however if this is a concern during selloffs we tend to see bonds perform much better than stocks. Money always goes somewhere on Wall Street. That said we are in a rising interest rate environment so it is anybody's guess. Furthermore, I would say it all depends on why the markets are declining. It is hard to pinpoint exactly where your money is best but a well thought out portfolio and diversified in my opinion is usually the best course of action. Markets trend up and if you have risk tolerance waiting it out is generally a good plan of attack.
It is not a matter of if, but when (and how much) the equity market will decline. Market declines are a normal and healthy part of equity investing, especially if you have what you refer to as a relatively high ratio of risk to return. I would suggest you concern yourself witht he time frame you will need the assets that you are investing. As the timing of these corrections/declines are virtually impossible to predict if you may need those funds within a few years it is likely unwise to expose those funds to equity market risk. If, however, due to your age (49) you have (likley) 15 to 20 years until retirement and hopefully another 20 to 30 years of a healthy retirement those funds have an investment duration that spans decades. As such short term market declines, though painful to endure, should be of less concern to you. Your situation is specific to you, your risk tolerance and time horizon. You should use those factors to determine a correct asset allocation that give you and your family the greatest potential for success.