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How to navigate volatile markets during retirement
Carmen Reinicke
September 24, 2020
Even though the U.S. stock market has been subject to heightened volatility so far in 2020, financial advisors say that retirees with investment portfolios shouldn’t let it spook them – instead, it’s a good time to stick with a previous plan.
The market has been on a roller coaster ride in 2020. The S&P 500 began the year extending its longest-ever bull market, which began after the 2008 financial crisis, and hit an all-time high in February. In March, the index fell more than 20% from that high into a bear market as the coronavirus pandemic sent investors into a tailspin.
After its March low, the S&P 500 rallied about 60% to notch another all-time high in early September. But following the record, the index has slumped, keeping investors on their toes.
For retirees living on a fixed income, or people planning to retire soon, such moves can be harrowing.
“The volatility that’s been experienced this year has been significantly more than in other years and is fueled by a lot of fear and concern around the pandemic,” said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California, which manages about $165 million in assets.
For those who plan to enter retirement during a choppy period in the stock market, there are a few key things to do to ease the transition from earning a paycheck to living off savings and investments.
Volatility can be your friend
First is to accept market volatility, which is relatively common, as a normal part of the process of investing and the best way to outrun inflation, according to Lineberger.
“Embrace the volatility because it’s why investors are getting paid to own stocks,” he said.
This means investors should stay calm even through extreme movements such as those seen in 2020. Even though stocks have gyrated in recent months, long-term market returns are still based on the same factors: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors Ltd., which manages around $800 million in assets.
In addition, sharp moves down can also be opportunities to buy more stocks and set yourself up for future gains, according to Abrams. “When you’re down 35% like we were in March, you get better entry points,” he said.
Have an emergency fund
Even if you know volatility is your friend in the long run, financial advisors recommend having a cash emergency fund on hand in case you retire during a market meltdown.
If the stock market falls, it’s better to spend that money than sell assets at a loss which can’t be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm with more than $500 million in assets under management.
“As much as it might pain you to spend that down, it’s for a rainy day and there was a monsoon in March,” said Zabiegala.
This also keeps stock investments in the game for big rebounds, which also happened this year. For example, an investor would have only needed three months to six months of living expenses in an emergency fund this year to avoid taking losses during the March meltdown, said Lineberger at Seaside Wealth Management. This approach would have also kept investments in the market for the record-breaking rebound rally stocks had after March.
Make a plan and stick to it
Financial advisors also recommend that you begin saving for retirement as soon as you can to give yourself the longest runway possible to accumulate wealth. Then, before you leave the workforce to live on your savings, it’s a good idea to rebalance your portfolio to guard against risk.
“We want to minimize the downside as much as possible,” said Zabiegala. “We’re trying to get on the kiddie roller coaster after getting off the big boy roller coaster.”
That means considering your long-term goals for retirement, and rotating assets between stocks, bonds and other investments to strike the right balance.
Advisors also note that the traditional portfolio balance of 60% stocks and 40% bonds may no longer be the best bet for retirees. Instead, investors may want to consider shifting that allocation to include other assets such as private equity, commodities and real estate to further manage risk, said Zabiegala.
It’s also important for retirees to shift their investment thinking to protecting their assets from growing them or aiming for the highest return.
“Managing the risk is a really important part,” said Leyla Morgillo, a CFP with Madison Financial Planning Group in Syracuse, New York, which manages about $200 million in assets. “It’s not about trying to shoot for the highest rate of return you can, it’s about protecting what you have.”
To stay committed to this goal, advisors recommend making a plan or road map for retirement investing long before you leave the workforce. This will act as a safeguard against making bad emotional decisions with your investments during extreme market events.
“Have the discipline to stick to your plan even when it doesn’t feel like the right thing to do,” said Lineberger at Seaside Wealth Management. “Checking your emotions at the door is the hardest aspect of being a successful investor but it’s the most important thing to do.”
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
https://www.cnbc.com/2020/09/24/-how-to-navigate-volatile-markets-during-retirement.html
Articles are not written or produced by the named representative and the information has not been verified. There is no guarantee as to the completeness or accuracy of the content. Quotes and remarks have been excerpted from conversations with the interviewer and may have been taken out of context. All remarks are hypothetical in nature and are intended to be informational only. They should not be regarded as investment advice, performance claims or testimonials. This is not a solicitation, recommendation or endorsement of any investment, investment strategy, tax strategy or legal advice. There is no guarantee that any strategies discussed will result in a positive outcome. You should discuss any legal, tax or financial matters with the appropriate professional. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal.
Neither asset allocation nor diversification guarantee a profit or protect against a loss.
S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Barclays U.S. Aggregate Bond Index is a composite of four major sub-indexes: US Government Index, US Credit Index, US Mortgage-Backed Securities Index, and US Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.
Investors cannot invest directly in an index.
Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. Moderate inflation is a common result of economic growth. Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.
There are some risks associated with investing in the stock markets: 1) Systematic risk - also known as market risk, this is the potential for the entire market to decline; 2) Unsystematic risk - the risk that any one stock may go down in value, independent of the stock market as a whole. This also incorporates business risk and event risk; and 3) Opportunity risk and liquidity risk.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.
A Certificate of Deposit (CD) is a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.
A variable annuity is an insurance contract which offers three basic features not commonly found in mutual funds: (1) annuity payout options that can provide guaranteed income for life; (2) a death benefit; and (3) tax-deferred treatment of earnings. When applicable, the tax deferred accrual feature is already provided by the tax-qualified retirement plan (e.g. 403(b), IRA, etc.). The U.S. Securities and Exchange Commission (Investor Tips: Variable Annuities) has suggested that for most investors it would be advantageous to make the maximum allowable contribution to a tax-qualified retirement plan before investing in a variable annuity. The separate account of a variable annuity is not a mutual fund. While separate accounts may have a name similar to a mutual fund, it is not the same pool of funds and will experience different performance than the mutual fund of the same or similar name. In addition, the financial ratings of the issuing insurance company do not apply to any non-guaranteed separate accounts. The value of the separate accounts that are not guaranteed will fluctuate in response to market changes and other factors. Variable annuities are designed to be long-term investments and early withdrawals may be subject to tax penalties and charges. Please obtain a prospectus for complete information including charges and expenses. Read it carefully before you invest or send money. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
The value of the shares of a Real Estate Investment Trust (REIT) fund will fluctuate with the value of the underlying assets (real estate properties.) There are special risk factors associated with REITs, such as interest rate risk and the illiquidity of the real estate market.Master
Limited Partnerships (MLPs) are a form of a publicly traded partnership. Although some units are traded on public exchanges some are nonpublic securities. MLPs generally must distribute to unit holders a majority of their distributable cash flow on an annual basis. MLPs must receive 90% of their income from qualified sources. Most MLPs are in the energy, timber or real estate business. An investment in MLP units involves risks that differ from a similar investment in equity securities, such as common stock, of a corporation. Holders of MLP units have the rights typically afforded to limited partners in a limited partnership. As compared to common shareholders of a corporation, holders of MLP units have more limited control and limited rights to vote on matters affecting the partnership. There are certain tax risks associated with an investment in MLP units. Additionally, conflicts of interest may exist between common unit holders, subordinated unit holders and the general partner of an MLP; for example a conflict may arise as a result of incentive distribution payments.
A business development company (BDC) is an organization that invests in and helps small- and medium-size companies grow in the initial stages of their development. Many BDCs are set up similarly to closed-end investment funds and are typically public companies whose shares are traded on major stock exchanges.
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Zachary Abrams
Manager, Wealth Management & Portfolio Analysis
CFP®
Nathan Creviston
Manager, Wealth Management and Portfolio Analysis
CFP®, ChFC®, RICP®
Rob Holub
Chief Investment Strategist
CFA, CFP®
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Aggregated Portfolio Data as of 12-19-2023.
S&P 500: a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States
Vanguard U.S. Dividend Growers: measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.
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