This article appeared in the Albuquerque Journal on December 16, 2024.
The U.S. stock market has been in a bull market during 2023 and 2024. A bull market (loosely defined as when stock prices increase over 20% from a recent low) and a bear market (stock prices decline over 20% from a recent high) are part of the financial lingo commonly used.
In 2022 the S&P 500 declined 19% and the bond market declined 13%. In 2023 the S&P 500 rose 24%, and it has risen over 25% year-to-date in 2024. However, we know the stock market doesn’t always rise, and corrections can be severe. Recent S&P 500 decreases included:
- 1987 Black Monday: market declined 20% on one day
- 2000 (dot-com bubble): the technology sector declined 78%
- Great Recession of 2008 (October of 2007-March of 2009): 52% decline
- March 2020 (beginning of the pandemic): 34% decline
We should expect the market to decline at times, and keeping a long-term perspective is helpful. The S&P 500 has increased roughly 14% per year over the past 10 years, 11% over the past 20 years, and just under 10% per year over the past 30 years. The message this should give every investor is to ensure you can hold on tight (not panic, and not sell) when a correction occurs. This, in essence, requires that you “bear-proof” your investments.
Do we know what’s coming? We do not. Some economists are predicting the euphoria from recent weeks will continue into 2025. Yet, other economists are predicting low returns for the stock market over the next decade, based on their belief that stock prices are currently much too high to sustain. Some are comparing their predictions for the U.S. stock market to Japan’s “lost decade” which actually turned into a lost three decades, beginning in 1989.
If the negative predications are correct, how can you protect your investments? Here are several strategies you can consider:
- Reduce the equity percentage in your investments. Although a “model” investment portfolio of 60% equities and 40% fixed income is often recommended, I do not believe it is appropriate for many people. Keep in mind that you want some equities because they have historically provided a much-needed long-term growth component to your investments. Equities tend to keep up with inflation, whereas fixed-income returns are negatively impacted by inflation.
As an example, equities declined 52% during the Great Recession, but bonds increased 5.5%. Bonds don’t always perform well when the stock market declines, but they often do.
What is the appropriate asset allocation for you? If you are comfortable with risk—and you are certain you will be able to sit tight if we have a major correction in the stock market—a high equity percentage may be justified.
However, if you are retired, or if you don’t want to risk watching your hard-earned investments decline, or if you simply don’t want to be at the mercy of the stock market, then you may want to keep your equity percentage low. Perhaps you choose a 50/50 portfolio or a 40/60 portfolio. I had some clients (before I retired from serving clients in late 2021) who wanted a very low percentage in equities because they did not want the fluctuations or the stress that could come from seeing their investment accounts decline. There is a saying that sometimes applies: “If you’ve already won the race, stop running.”
You want your investments to work for you, but that does not mean they have to be overly risky. I encourage you to think carefully about what you want your asset allocation to be. It is an important decision and one that only you can make.
- Don’t neglect your finances. Most investors are not actively involved in managing their investment accounts. Even if you have a financial advisor or a financial planner, I encourage you to understand your investments. Perhaps you have all index funds. That can work well, and it makes managing your investments much simpler. However, even with that strategy, you should know what your asset allocation is and why you have each index fund you own. How much of your investment portfolio is in large-cap stocks, mid-cap, and small-cap? How much is in international and why? How much is in growth stocks compared to value stocks? Do you have a high percentage in technology stocks? What is the average expense ratio in the mutual funds (or exchange-traded funds) that you own?
Perhaps you own actively-managed funds or individual stocks in your investment accounts. Have you analyzed how they have been performing in recent years and whether they should continue to be in your account? Are the investments in your taxable accounts tax-efficient? Should you make some changes? Is there some tax-loss harvesting you can do in your taxable accounts before year-end that may reduce your 2024 taxes?
Do you want to do a Roth conversion before year-end to convert some money in a Traditional IRA (which is tax-deferred) to a Roth IRA (where it will be tax-free)? Keep in mind that income taxes will be due on the amount you convert in 2024, but you may save significant taxes in the long-term.
- Review your emergency fund and increase your savings. In last month’s article, I recommended that readers check to see what they are earning on their savings and checking accounts. Money market funds are still paying close to 5%, which is a great deal compared to the measly less-than-1% many banks and credit unions pay. Review your bank statements, ask at your bank or credit union how you can increase the yield on your savings, and make changes if necessary.
Check your employer’s retirement plan (Roth 401k or Roth 403b) and increase the amount you are contributing. If you have been contributing 5%, increase it to 8% or 10%. If you have not contributed to a Roth IRA (which you can do in addition to your employer’s Roth 401k), open a Roth IRA account now and start contributing. Just be aware that you must have earned income to contribute to a Roth IRA. Therefore, retirees without a job cannot contribute. There are also income limitations for contributing to a Roth IRA. A single person can make up to $146,000 (in modified adjusted gross income) and contribute the full amount allowed for 2024, which is $7,000 for persons under 50 and $8,000 for persons 50 and over. For married couples, the income limitation is $230,000.
The rules are different for contributing to a Roth IRA versus converting to a Roth IRA. Although retirees without earned income cannot contribute to a Roth IRA, retirees can convert a traditional IRA to a Roth IRA at any age. If the retiree is over the age for required RMDs (required minimum distributions), they must take their RMD first during the year, and then they can convert whatever amount they choose.
- Plan ahead to reduce expenses if necessary. If the S&P 500 has a significant decline, such as the 52% decline during the 2008 Great Recession, I suggest you be ready to reduce expenses. Making certain your credit card bills are paid off in full each month (so you have no credit card debt) is a good place to start. Delaying buying a car, new appliances, or taking a big trip are all possibilities. Cutting back on entertainment and restaurant expenses, and cancelling some monthly subscriptions (Netflix, streaming services, etc.) can also help.
If you live in New Mexico, replacing expensive long-distance trips with driving trips in the “Land of Enchantment” is easy. There are many beautiful towns to explore, and sites to visit. Perhaps you will plan to expand your horizons (in New Mexico) during 2025.
There are many things we cannot control, and the performance of the stock and bond markets are included. However, we can be proactive, and take action now to be financially secure if a major downturn occurs.
Donna Skeels Cygan, CFP®, MBA is the author of The Joy of Financial Security. She owned a fee-only financial planning firm in Albuquerque for over 20 years before recently retiring. She welcomes emails from readers at [email protected].