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Nothing hurts your retirement savings like a stock-market drop, with NASDAQ losing 78% during Dot-com bubble and S&P loosing 58% in the 2007-2009 bear market. The current bull-market is getting shaky and long in the tooth, so one should be cautious. However, you can take various steps to minimize losses during those prolonged market corrections, and end-up with a much better retirement. While your own financial advisor cannot predict the smaller corrections, they should be able to tell when the big ones are in town. Ask your financial adviser before you do anything, since rules vary by country. Here comes the list.
- Consider temporarily going for cash
Cash does not much to grow your account, but it avoids losses. This is a boring option, but it is very safe.
- Can you short-sell?
You can make money when stock rise in value, which is also called going long, but you can also make money by falling stock prices, which is called short-selling. Someone who short-sold the S&P index during the last bear-market would have PROFITED 58%, instead of losing the same amount. It is usually much better to short-sell entire indexes than picking individual stocks to short, unless you know ALLOT about finance. Investors who ride the bull upwards by going long and shorting the bear downwards, grow substantially bigger retirement accounts than those who ride out the storm. Most save for their retirement in big mutual funds who do not have the mandate to short-sell, meaning they will lose money during the storm whether they want or not.
- Alternative strategies
You can invest in commodities, REITS, bonds and other instruments. At least in the past, putting money in bonds was a way to protect your money during market corrections. However, the bond market is currently in trouble. Further, alternatives like precious metals (e.g. gold) have not been attractive as of late… though this could change soon. Gold is a classic safe refuge when market is in turmoil. If you want gold in your portfolio, then do not waste money by buying fancy engraved coins etc. focus on getting the most bang for your buck. Many investors just buy the SPDR Gold Trust (GLD).
- Increase your investment
This might at first sound crazy, but it is actually clever during the later faces of a bear-market. Bear in mind that you will be getting stocks at increasingly discounted prices, and it is very hard to know when the market bottoms out. Hence, when the market eventually rebounds, your profit will be attractive.
So, there are four strategies to consider. As always, you should talk with your retirement provider to learn what options are available and suitable for your risk tolerance.
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