The titans of Wall Street are nervous. The financial press has carried stories on the growing market concerns of well-known financiers and hedge fund managers.
The tone of the growing ranks of market skeptics is more wary than apocalyptic. The economy and corporate earnings are in good shape. The unemployment rate is relatively low; the labor force participation rate is picking up. Inflation is tame. Veteran investors are unnerved at how the market seemingly climbs to record highs nearly every week.
The safe forecast is to expect the stock market will take a bad tumble. The timing and the depth of the decline are uncertain. You can’t pierce the fog of uncertainty. You can’t manage the outcome. What you can do is manage the risk of your portfolio.
First, I’d forget about market dynamics. Put down mutual fund reports. Don’t pay attention to market predictions. Instead, focus on your life circumstances, especially if you’re facing a major life transition. Yes, the market titans are worried, but that doesn’t mean you should be concerned. That is, unless your life calls for taking action.
Here’s what I mean. Let’s say you’re 28 years old and your career is starting to flourish. You work at a company with a 401(k). You’ve invested the money in a low-fee life cycle fund with a target date of 2050, around the time you’ll reach the traditional retirement age of 65. Staying the course is reasonable.
In sharp contrast, imagine a 66-year-old thinking about filing for Social Security because of deteriorating health. Looking to lock in at least some gains to ensure future income security is sensible.
Second, review your portfolio to make sure it’s well diversified. Diversification is a time-honored tactic for protecting an overall portfolio from market turmoil since some of your investments will zig while others will zag.
Finally, steer clear of funds offering financial protection from market swoons. These offerings are often called “black swan” portfolios. A black swan is an outlier event that dramatically affects the economy and markets. Problem is, black swan portfolio strategies are usually expensive and complex, assuming they even work.
A better hedge against downside risk is cash, including federally insured savings accounts and Treasury bills. Cash is cheap. Cash is easy. Of course, the price for protecting part of your portfolio from downside risk with cash is a low return. That’s a sound trade-off to make.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.