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401(k) Savers: Tips for building retirement nest eggs without taking too much risk – WBIR-TV

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Getting squeamish about a U.S. stock market that’s near record highs and far from cheap?  

You’re not alone.

Even financial planners who help Main Street investors save for retirement through a 401(k), or for their kids’ college with a 529 plan admit they’re nervous as stock prices keep climbing nearly nine years into the bull run.

Traders work on the floor of the New York Stock Exchange on Nov. 9, 2017.

“The market outlook is clear skies right now, which makes me a little nervous because clear skies doesn’t mean you can’t have a thunderstorm roll in quickly,” says Lew Altfest, president of New York-based Altfest Personal Wealth Management.

Protecting an investment portfolio from a coming financial storm, however, doesn’t mean you have to sell everything or rip up a well-thought-out financial plan or let a short-term market downdraft worry you sick. That’s especially true if your goal is to sock away money for use in 10, 20 or 30 years, say financial planners and wealth management pros.

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“We want to get our clients away from worrying about short-term market uncertainties, because there’s always a reason to be fearful,” explains Brad Bernstein, senior vice president at UBS Wealth Management Americas in Philadelphia. “Investors should stay focused on their financial goals, risk tolerance and investment time frame.”

Here are tips for investors who need to put aside money for retirement, but want to stay away from risky investments or minimize losses if the market heads south.

DON’T LOSE SIGHT OF LONG-TERM PICTURE

What happens in the market tomorrow, next week or even next year really doesn’t matter for investors who don’t have to touch their savings for 10 years or more, says Bernstein.

If your financial plan, for example, is to save up enough for your pre-school-age son’s or daughter’s college tuition 12 to 15 years from now, you should have most of those savings dollars invested in stocks, no matter if the market swoons or soars, Bernstein explains. The same goes for money that’s targeting retirement in 2037 or 2047.

“Every account should be invested for its specific goals and objectives,” says Bernstein. “That perspective is critical for investment success.”

He notes that an investor who had the misfortune of buying at the top of the U.S. stock market in 2007 would still be up 65% today, which amounts to an annualized gain of more than 6%, despite the market losing more than half of its value in the 2007-09 bear. Similarly, an investor who got spooked out of the market at the start of 2016, when U.S. stocks cratered more than 10% in the year’s first six weeks, would have missed out on a gain of more than 40% since then.

AVOID AN ALL-AMERICAN PORTFOLIO

Sure, President Trump keeps pushing an “America First” agenda. But that doesn’t mean you should have all your cash riding on a U.S. stock market that is currently trading at a price-to-earnings ratio that is nearly 25% higher than the average P-E over the past 50 years, according to earnings-tracker Thomson Reuters.

There are plenty of investment opportunities outside the U.S. where you can still get exposure to stocks but at cheaper prices relative to earnings — and also set your portfolio up for potentially bigger gains, Altfest says.

If a market downturn strikes the U.S., it won’t necessarily drag down stocks in places like Europe and Asia, which have lower valuations and economies that are still in earlier stages of their rebound cycles following the 2008 financial crisis, he says. Stocks in Europe and Asia are trading at about 16 times expected earnings in the next four quarters, which is lower than the 18.2 price-to-earnings ratio of the Standard & Poor’s 500 stock index.

“Go international,” says Altfest, noting that it is a way to diversify and avoid a “U.S.-specific correction.”

TRIM STOCK HOLDINGS BEFORE THE NEXT CRISIS

If you don’t think you’ll be able to stomach a sizable market dive with your current helping of stocks, trim your holdings before the next crisis, Altfest says. 

For example, if you have 70% of your portfolio invested in U.S. stocks, trim it back to, say, 50% of your holdings. That way if stocks overall go into a bear market, defined as a drop of 20% or more, your portfolio will only suffer half the losses, Altfest explains.

“Nobody I know can get out at the peak unless they are lucky,” Altfest says, adding that investors don’t want to wait too long and sell out at the wrong time when stocks have already suffered a big drop. 

PROTECT YOUR MONEY FROM INFLATION

Inflation has been tame for years, and that’s a big reason why the Federal Reserve has been reluctant to raise historically low interest rates too quickly. But for an investor who still wants the stability and lower volatility of bonds in the event that inflation does spike, Altfest recommends so-called Treasury Inflation Protected Securities, better known as TIPS.

Unlike traditional U.S. government bonds, the principal — or your initial investment — of a TIPS increases with inflation, which is measured by the Consumer Price Index, a common metric used to measure the cost of everyday goods Americans purchase. 

“TIPS,” says Altfest, “don’t lose their principal value.” 

TAKE PROFITS ON BIG WINNERS 

Investors with big gains on high-flying technology stocks like Apple, Google-parent Alphabet or Facebook might want to consider lightening up on these winners. But the key to this strategy is to stockpile the cash and be ready to deploy it opportunistically when the market is down 20% to 30%, Altfest says.

“Keep the cash out of the market until people are screaming at you to buy their shares so they can get out,” says Altfest, noting the shares will likely cost less when sellers are desperate.

With the market still strong, now’s the time for investors to analyze their 401(k) and other accounts to make sure they’re not taking more risk than they think, says Ron Carson, founder and CEO of Carson Group, an Omaha-based financial firm that advises clients with assets totaling $10 billion. 

“When it comes to risk, most people think they are going only 5 miles per hour over the speed limit, but many are really going 50 miles per hour over,” says Carson.

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