Reader Mel has invested $1.1 million with 45% allocated to the domestic market, 30% to the international arena and 15% to bonds and other small holdings.
Here’s a portion of his comment:
As the market heats up, I worry we may be in for a big correction. I am 70 years old and plan to retire in 3-4 years. Can you provide any advice? If you only do this for a cost, I’d like to know more about that. I manage all my Fidelity holdings. Thanks.
The important point here is not to belabor as to whether his allocations are correct for his particular circumstances, most of which are not known at this point.
Markets are so intertwined and correlated these days that many (if not all) allocation models are pretty useless anyway once the trend heads south again. Most did not learn this lesson last year, or in 2001 for that matter, so the same mistakes will be repeated.
The most important thing that Mel can do is to set up his trailing sell stops for all of his holdings so that his portfolio stays intact for the most part when the next correction materializes. With the current economic backdrop, I do not see this alleged recovery continuing forever, so a meaningful correction will be a virtual guarantee—the timing of it is the big unknown.
Anyone with any type of portfolio needs to protect himself against too much downside risk. The best way I know of is via the use of trailing sells stops. I still remember the phone calls from investors like Mel in 2001, who were desperately trying to figure out what to do “after” their $1 million portfolio was slashed in half thereby changing their retirement plans forever.
In that sense, Mel is ahead of the crowd; he realizes the tremendous downside risk and intends to take action “before” serious portfolio damage occurs. I commend him for that and hope that you are doing the same thing.
Comments 8
Excellent advice. However, with mutual funds in retirement plans, sell stops have to be implemented mentally as such stop facilities would not be available normally.
Mal,
As has been discussed on several occasions, sell stops should never be placed ahead of time even if it was possible. They should be tracked on a spreadsheet, updated daily and then placed only when triggered based on day-ending prices. At least, that's how I handle it for clients in my advisor practice.
Ulli…
Ulli,
Thanks for your free service as it is very informative and to the point.
About the 70 year old, I found it interesting that he has over one million dollars and plans to retire in 3-4 years. That is amazing that he has that great attitude about continuing to work. Bravo to 70 year old.
I agree with the trailing stop suggestion, otherwise one can get severly whacked and I too believe a major correction is lurking out there waiting to attack. I personally am ready for it, so bring it on.
Yahoo Finance has a free Alert service. You set the price beyond which you do not want your security to fall, and when that price is reached they send you a reminder e-mail. The you can act or not. The service is disconnected from your portfolio, it is just a warning. Good for bot the Mutual Funds and ETFs.
Romuald,
You can do that but you need to update the stop every day. Remember, it's trailing and not static.
Ulli…
Don't you only need to update the stop if the fund has only gone up? Not if it has gone down.
Anon,
That's correct and that's what I meant to say.
Ulli…
Mal, some retirement firms allow the investors (employees) to access their 401, 457,or 403s online. I was able to transfer my funds into a safer money market fund which saved me.