As Dow nears 40,000, here’s what experts say to do in case of a pullback

A man sits on the Wall Street bull near the New York Stock Exchange (NYSE) on November 24, 2020 in New York.

Spencer Platt | Getty Images

The stock market could hit a major milestone if the Dow Jones Industrial Average hits 40,000.

However, even though stocks have climbed, investors fear a pullback, financial advisers say.

They are not alone in having these concerns.

A recent CNBC survey of investment professionals found that 61% believe the market has gone too far, too fast and that a market downturn could occur.

“We feel like we’re at an inflection point where things could go one way or the other,” said Christine Benz, director of personal finance and retirement planning at Morningstar.

Will there be a setback?

After a virtually uninterrupted market rally over the past four or five months, it wouldn’t be surprising to see a pullback, said Angelo Kourkafas, senior investment strategist at Edward Jones.

This would likely take the form of a temporary correction rather than a prolonged bear market, he said.

For investors who have turned to cash, certificates of deposit or bonds, a pullback could be an opportunity to deploy those funds into the market, Kourkafas said.

If you’re investing for retirement or other life goals, it’s best to avoid trying to time the market, said Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, an advisory firm. financial and wealth management company based in Atlanta. .

“The stock market is a long-term investment,” said Jenkin, who is also a member of CNBC’s advisory board.

Will the elections hurt the markets?

Investors are worried that the presidential election results could derail markets, surveys show.

But experts say these concerns are misguided.

“It’s really, really hard to find any evidence in the data that policy is a long-term determinant of market performance,” Kourkafas said.

However, there could be increased volatility in the months leading up to the election, he said.

What’s unique this time is that we already know the two likely candidates – current President Joe Biden and former President Donald Trump – and markets have performed equally well under both leaders , did he declare.

Instead, the outlook could depend more on other factors such as interest rates, corporate profits and economic growth, he said.

Financial advisors, including Louis Barajas, a CFP and enrolled agent, say their clients fear the election could affect their portfolios.

“I tell them, ‘Look, presidents come, presidents go, the economy is going to change. But in the long run, the market tends to be up,'” said Barajas, CEO of International Private Wealth Advisors in Irvine, California. , and also a member of the CNBC FA Council.

Rather than focusing on external events, Barajas encourages her clients to focus on their personal goals.

How to be sure you’re protected “no matter what”

Current market uncertainty reminds us of the value of humility, Morningstar’s Benz said.

And the best way to express humility in portfolios is to diversify them, she said.

“No matter what happens, we are reasonably well protected,” Benz said.

For younger investors, that could mean ditching U.S. stocks in favor of non-U.S. securities, she said. This can be done through a fund that reflects global market capitalization, such as the Vanguard Total World Stock ETF.

Older investors may want to take advantage of the higher returns of fixed income and add more safer assets to their portfolios, she said. This may include cash, high-quality short-term and medium-term bonds to create a spending runway, even if stocks fall.

“You can have a safer portfolio and hope to get a decent rate of return today,” Benz said.

As part of its efforts for National Financial Literacy Month, CNBC will feature stories throughout the month dedicated to helping people manage, grow and protect their money so they can truly live ambitiously.

If you’re already retired and spending from your wallet, it’s worth putting these safeguards in place.

Finding the right mix of assets will depend on your personal timeline.

For financial goals that aren’t at least five years away, it doesn’t make sense to invest in the stock market, Jenkin said.

To test your own portfolio allocation based on your age, Jenkin said he likes to follow the rule of 120: Subtract your age from that number to figure out how you should invest. So if you’re 60, for example, a 60% allocation to stocks might make sense.

When it comes to reviewing your portfolio allocation, it’s wise to set your own timeline rather than react to market or other events.

“Make a plan to do it once a year or so,” Benz said.


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