On Monday, investors had to pick their jaws off the ground after the Dow Jones Industrial Average dropped a whopping 1,175 points (its worst one-day point drop on record), or 4.6%.
The selloff, which spread across the globe, led many average investors – those nearing retirement, in particular – to panic and consider what they should do with their investments should the losses extend. (By midday Tuesday, the Dow and S&P 500 indexes recovered some of their losses and were in the green.)
Avani Ramnani, certified financial planner at Francis Financial, says that many of her clients are calling with the same question about what they should do with investments. Regardless of age, she has given them all the same advice.
“Right now we’re telling clients not to do anything,” she tells Yahoo Finance.
The reason: most people, even those nearing retirement, will see their portfolios rebound if they leave the money alone.
“Even for people in their 60s, you can potentially have to count on retirement savings for the next 20 or 30 years in many cases,” said Ramnani. “So with that length of time, you will have the opportunity to recover from these types of drops, and the best way to do that is to stay invested.”
If you do want to take some action, Ramnani suggests making sure that your portfolio is diversified.
The definition of diversification really differs from person to person, and factors include your age, and whether you’re still earning income. Typically it involves having a good combination of large-cap stock, small-cap stock, US stock and non-US stock.
We typically invest more aggressively when we’re younger, so most of our retirement savings are wrapped up in the stock market. If you’re five or so years away from retirement, the rule of thumb is that you move more of your investments into bonds. That’s why mature investors should also make sure their bonds are diversified.
Ramnani says low interest rates have inspired some people to gravitate toward low-quality bonds. These are called “high yield bonds” or “junk bonds,” and they have higher risk, but provide higher returns.
However, Ramnani wants older investors to be less risk averse. “The function of having bonds in your portfolio is to serve as an airbag if the market crashes. If your airbag is of low quality, then they don’t serve their purpose,” she says.
The same advice holds true for the last time the market experienced whipsaw volatility and steep drops (and the time before that, etc.): Don’t panic. The US economy is looking strong, unemployment is at 4.1%, the lowest since 2000. And Reuters reports that average pay rose by more than 3% in at least half of US states in 2017, the fastest growth since 2009.
“Volatility like this bound to happen, but there is no immediate concern of a long-term crash coming up,” says Ramnani.