Tips for surviving the storm if stock market collapses

It frustrates me when I listen to the likes of CNBC, Business Insider and the Wall Street Journal interview stock market contrarians.

Consider:

“Not a total shock if stocks plummet 25 percent by October,” Congressman Ron Paul, a former presidential candidate, said in a July 3 interview with CNBC’s Stephanie Landsman. Paul served on the Committee on Financial Services.

A mystery trader is making a massive bet that the CBOE Volatility Index — or VIX — will surge from its near-record lows. If successful, it would yield a $262 million payout, Business Insider reported.

“The worst market crash in my lifetime is coming this year or next,” Jim Rogers, Chairman of Rogers Holdings and Beeland Interests and a Quantum Fund co-founder, said to Business Insider. “This could be serious stuff. It’s been over eight years, the longest or second-longest bull run.”

Chances are you lost a lot of money when the market tanked in 2008. Now you’ve likely earned back losses and are largely whole again and want to stay that way.

The second-longest bull market has been churning reliably for more than eight years, so it’s entirely reasonable to consider whether the sky is falling. Earnings growth sustains bull markets, and earnings growth may continue, but it’s also possible for stocks to turn into a bursting bubble.

So, let’s consider what to do if the contrarians are right:

Don’t panic

Selling when the stock market is correcting is often a painful mistake for those approaching retirement. Diversification usually doesn’t help as much when all market sectors fall simultaneously.

After a fall, other investors often rush in to buy damaged stocks and stock prices – hopefully – rise. Don’t panic by selling immediately. Retirees receiving distributions don’t have the luxury of replenishing savings, so they have to act strategically in bear markets.

Shun extreme investing

I don’t think it’s appropriate for a retiree to put 100 percent of their retirement savings into equities. Sustaining during a bear market may involve using cash reserves until the market rebounds. Ensure surviving a bear market without decimating principle by creating the right mix of stocks and bonds for retirement income.

Think about paring down equities because stocks bought at high prices or premiums often offer lower future gains. Retirees may better confront a future bear markets with a balanced portfolio consisting of a larger percentage in bonds and a smaller percentage in equities. Add additional equities or increase equity exposure later if circumstances allow.

Move to quality

Buying more stocks at a discount post-crash may achieve the goal of rebalancing a portfolio. Consider selling speculative stocks without profits before market turbulence.

It’s often foolish holding speculative stocks when anticipated rewards are minuscule. And there often are benefits of owing dividend paying stocks and bonds yielding about three percent. This modest yield might be close to meeting a retiree’s income needs. Keep an eye on these returns as they may change over time.

Look for guarantees

Putting money into investments that maintain value in falling markets is probably a good move. Treasuries and certificates of deposit may be a decent play for short-term investors. Longer-term investors might look into the benefits of owing fixed or indexed annuities, too. Annuity guarantees are subject to the claims paying ability of the insurer.

Consider investing in preferred stocks of blue-chip companies with regular dividends, but may have more risk than CDs and treasuries. Corporate bonds and mortgaged-backed securities often yield more than treasuries and are thought less sensitive to interest-rate swings. Steady your portfolio by adding cash and smarter bond components. But remember that these returns may fluctuate over time.

Add high-grade bonds

Junk bonds offering high returns are often risky. Limit your exposure to junk bonds because a market collapse may spark more defaults. Other defensive plays use high-quality bond mutual funds or certain ETFs tied, for example, to a Barclays U.S. Aggregate Bond Index. In 2008, according to The Balance, some bond funds earned 5.1 percent or more, while stocks fell by nearly 37 percent.

Seek foreign investments

European, Japanese and emerging markets are thought more volatile than U.S. investments. Smart diversification could offer higher returns than comparable U.S. equities. Still, it might make sense to keep the majority of your equities domestic rather than foreign.

This story was originally published August 7, 2017 at 11:09 AM with the headline "Tips for surviving the storm if stock market collapses."