By Catherine Brock, The Motley Fool
The U.S. economy may be opening up again, but we're not out of the recession woods just yet. On June 24, the International Monetary Fund (IMF) went on record to say its initial prediction for global recession due to the coronavirus pandemic was too conservative. Specifically, the IMF updated its outlook from a 3% global economic contraction to a 4.9% pullback. And the recovery in 2021 is expected to be weak or even non-existent if COVID-19 cases surge again.
That news could have you wondering how to protect your retirement portfolio in the weeks and months ahead. You don't want to live through another 20% or 30% drop in your retirement savings, after all. The thing is, that line of thinking already has you at risk of making the wrong move. Efforts to spare yourself from future market volatility often result in big investing mistakes. Here are three examples.
1. Not investing at all
Mistake No. 1 is not investing at all. If you can afford to contribute to your 401(k) or IRA during this recession, then you need to invest those contributions. Halting your investments because you're worried about those positions losing value is a strategy that will backfire.
Here's why. Cash does not increase in value as the economy returns to growth, but share prices do. If you sit on cash until the economy has recovered, you miss an opportunity to benefit from the upswing. You'll end up paying higher prices for shares you could have gotten for less. And if you invest in dividend payers, you'll also forgo months of dividend payments and higher dividend yields.
2. Trying to time the market
Any investment decision you make based on current market conditions is an attempt to time the market. Whether it's selling off a position, deciding not to invest, or pausing your retirement contributions, if you're making these choices solely to protect yourself from another market dip, you're timing.
The challenge here is that one timing decision always leads to another. When you liquidate, for example, you're then stuck with the responsibility of deciding when to reinvest. And while you might achieve the desired result on that first decision, your luck won't hold for the second, third, or fourth choices. Remember that even professional fund managers can't time the market consistently.
Rather than reacting to what's happening today, set up a consistent investing schedule and stick to it. Ignore the ups and downs of this week or even this year. You're invested in the stock market because it trends up over long periods of time. That long-term growth will fund your retirement, but only if you can withstand the short-term volatility in the meantime.
3. Going ultra-conservative
Reevaluating the stability of your portfolio in these uncertain times isn't a bad idea. But don't take the stability approach too far. Going all-in on fixed-income investments, for example, severely limits your growth potential. Those fixed income securities will throw off cash, but they won't show the same growth as equities will when the economy bounces back.
The vast majority of people who aren't yet retired should hold at least 50% of their portfolios in equities. The younger you are, the higher that percentage can be.
Remember, too, that stability isn't just a function of equities versus fixed income. You can also reduce the risk in your portfolio by improving the quality of your equity positions. Think large-cap index funds, longtime dividend payers, and established companies with experienced management teams and loyal customers. These are the picks that are best positioned to weather any economic cycle.
Don't change your retirement plan
You can build more wealth over time by investing consistently, month in and month out -- even as the economy and the market expand and contract. The more you tinker with your approach to avoid volatility, the more likely you are to undermine your wealth-building efforts. If you feel the need to do something, review your equity holdings and shift to higher-quality positions. From there, you shouldn't need to do anything but wait.
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