First Person: Rebalancing My Portfolio Before a Crash

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Some experts warn against "setting and forgetting" a portfolio. Although a hands-off approach might work during an extended bull market, I am more interested in protecting and preserving my gains. I always rebalance my portfolio just before my birthday to make sure I have the appropriate mix of assets for my age. However, I go back into my retirement accounts to make more drastic changes when I'm afraid of a major market correction or stock market crash. I know I'm on the right track when my portfolio goes up or at least maintains on days when there is a steep selloff. According to a recent CNBC article, the Dow Jones Industrial Average recently entered correction territory. Another piece by CNBC pointed out that stocks are at the highest percentage of household assets (28.7 percent) since before the Great Recession. According to the article, the last time stocks reached almost 30 percent of assets, there was a major correction within one year. In addition to rebalancing my portfolio, I am taking steps to protect my retirement future retirement savings.

Changing my contributions

Instead of allowing my new retirement contributions to automatically be divvied up between a range of mutual funds, I change my elections. Instead of putting money into stock-heavy mutual funds, I shift most of the "new money" going into my 401(k) into bonds and stable funds. I also lower the percentage of money I save into my Roth 401(k), shifting instead to my Roth IRA. Within my Roth IRA, I have more flexibility to choose how I want to save during a correction and prior to a possible stock market crash.

Getting in bed with the bears

In the late 1990s, I got caught up in the euphoria of the dot.com stock market bubble. When the market began to slide, I didn't know what to do with my portfolio. I felt as though it was too late to sell and too late to buy contrarian or bear funds. I now own shares in bearish funds that do well when the stock market does poorly. For me, it's a way to diversify my portfolio since I can't predict whether the market will continue to go up or go down.

Setting my stop losses

During the bull market, I have had the time to let my individual stocks reach a profitable position before setting my stop losses. I guard against any losses whatsoever. Because I am anticipating an imminent stock market crash, I don't feel as though I have time to wait for all of my positions to enter the positive territory. I have to decide how much I'm willing to lose if the market tanks. At this time, I'm setting stop losses at 20 percent below the current value. If any of the positions go up within the next few months, I'll change my stop losses.

When I was in my 20s, I could set and forget my portfolio. In fact, I am not opposed to having some target-date retirement funds within my 401(k) plan. Ultimately, I invest in the stock market to win. I'd like to win even when the overall market is on a losing streak. For me, rebalancing my portfolio isn't just about changing it up so I have 42 percent in bonds and 58 percent in stocks. I also research gold funds, exchange-traded notes (ETNS) that benefit from volatility and downward trends. I won't be giddy if the stock market crashes, but I won't be crying in my coffee either.

More from this contributor:

Preventing a Bag Lady Future

Guarding Against the Next Crash with Stop Losses

Rebalancing With the 100-Minus-Age Rule

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