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The only sure thing for investors is continued volatility in the stock markets, according to Bill Wood, a certified financial planner and a partner at The Advisory Group in Centerville, who said such volatility will create both pitfalls and opportunities for investors in 2017.
“This is going to be an interesting year for investors,” Wood said. “I don’t see the entire stock market participating in whatever growth we get this year. But many investors are going to be looking at 2016 and saying gosh my 401(k) did pretty darn well.”
Wood warned investors against “getting all Trumped up” by the post-election stock rally and piling into the market based on recent stock gains, which are not guaranteed to continue.
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Instead, he advises most investors to continue to make regular, steady investments in stocks through their 401(k)s, which have become the primary investment vehicle for most working-age adults. They’ll benefit from the principle of dollar-cost-averaging in a volatile market as their fixed paycheck deductions buy more shares in a declining market, thereby increasing their gains when the market rises again.
“There’s an advantage to continuing to contribute to your 401k at the highest level that you can,” Wood said. “This is going to be a volatile year, and there are going to be opportunities to get into the market at lower levels. The way to do that on a no-brainer basis is through your 401(k).”
While most people should have at least some investment in the stock market, investors should be prudent and invest based on the risk they can assume at their stage in life, said Curvin Miller, a retirement planning counselor with Fairborn-based Russell & Company Total Wealth Management and co-host of AM 1290 and News 95.7 WHIO’s Saturday show “Retirement Rescue Radio.”
Miller advises his clients to abide by the old rule of thumb to subtract their age from the number 100 to determine the share of investable assets held in stocks.
“If you’re close to retirement, it’s important to be cautious,” according to Miller, who said most 65-year-olds should have no more than 35 percent of their investments in stock. “But if you’re a younger investor, and you have a longer runway to retirement, it’s important to stop living in the moment and start thinking about the future a little bit.”
For every investor, protecting their gains may be the biggest challenge under current market conditions, Miller said.
While traditional asset allocation generally involves a weighted distribution between stocks and bonds, that strategy is risky in the rising interest rate environment foreshadowed by the Fed, which last month raised the benchmark federal-funds rate for only the second time in a decade and promised several more rate hikes this year.
As a general rule, when rates rise, bond prices fall, and bondholders could take a hit if the Fed becomes more aggressive about tightening.
“In a rising-rate environment, bonds are where you don’t want to be,” Miller said. “I think bonds need to come with a warning label right now. I’d be looking for bond alternatives, things that are not as interest-rate sensitive, such as private opportunistic real estate or different types of (dividend-paying) preferred stocks.”