Over the past few years, those investing in retirement accounts have seen particularly good returns. In 2017, U.S stocks gained nearly 22% – almost 50% more than the historic average. But, experts predict that we might see significantly lower returns in the year to come. This is due to stretched stock valuations, and the Federal Reserve potentially raising short-term interest rates three times in 2018. Now is the perfect time to readjust your investment strategy, so that you can reap the biggest rewards of the market this year. Here are 3 ways to adjust your retirement savings.
1. Lower Your Expectations
Even though you are used to seeing double-digit gains like you have through the past nine years, don’t always assume that your nest egg will climb at the same rate. According to a 401k survey by BlackRock, two-thirds of retirement investors are counting on high returns, and 20% of those believe their gains will be even higher.
But, according to investment firms like J.P Morgan and Vanguard, those expectations are quite optimistic. Vanguard’s 2018 economic and market outlook describes this year’s market as “one of higher risks and lower returns.” The company estimates U.S stocks will gain 3% to 5% per year, over the next 10 years. With bonds returning 2.5% to 3.5% annually. J.P Morgan predicts similar stock gains, with a slightly higher annualized 5.5%. However, these are just estimated so don’t treat them as guarantees. But still, don’t be too shocked if your returns aren’t as high as previous years.
2. Reassess Your Stock-Bond Mix
Stocks have been outperforming bonds largely during recent years, so your retirement account might be more stock-heavy than you think. If you haven’t been rebalancing your portfolio at all, you will need to sell off some stock holdings and replace them with bonds.
For instance, if your portfolio started with a reasonable 60% in stocks and 40% bonds five years ago, and you chose to reinvest all of your gains, you’ll now have 75% stocks and only 25% bonds. It’s only good to have a large number of stocks when stock prices are climbing, but according to 2018 market predictions, you’ll need to reassess your stock-bond mix to avoid losses.
To figure out the best risk vs reward ratio for you, complete Vanguard’s free online risk tolerance test. The test weighs up how long you’ll be keeping your money in the market, among other factors like your reaction to a setback. After answering 11 questions you should find your perfect stock to bond ratio.
3. Take a Hard Look at Costs
While you aren’t able to single-handedly increase market returns, there are other ways to boost your portfolio. You can get a larger share of returns by focusing on funds and ETFs with low fees. Due to lower stock returns, it’s important to cut back the amount you pay in costs.
Over the course of your working life, if you lower your investment fees by even half a percentage point, you can increase your nest egg by 10% or more. The best way to implement this strategy is to invest as much as possible in low-cost index funds. According to a study by Morningstar, investors pay just 0.17% of assets annually, compared to 0.75% for investors in actively managed funds. You can find low-cost funds and ETFs of all kinds on Morningstar’s basic fund or ETF screener.
It’s impossible to eliminate risk from investing, but by following these pointers you’ll set yourself up better to be able to deal with it. Put your retirement investments into the best position you can, so that your portfolio can thrive no matter what 2018 brings.