By Travis Dufner
Retirement is a long-awaited milestone, but it’s often accompanied by a unique set of financial challenges. Perhaps none of these challenges is more difficult than effectively navigating the ever-shifting tides of market volatility.
Yet even in the face of erratic market conditions, individuals can work toward a comfortable retirement by understanding the factors that influence market volatility and putting a well-defined investment plan into action.
In this article, I share strategic, well-diversified approaches for effectively navigating challenges during volatile times.
Understanding Market Volatility
Market volatility is the fluctuation in the price of a security or market index over a given period. Simply put, it measures frequent and significant price changes in financial markets.
Market volatility is an inherent characteristic of financial markets. A number of variables, including economic growth, inflation, interest rates, geopolitical events, and investor sentiment, have caused market cycles of ups and downs throughout history.
Although it can cause anxiety, volatility is not always negative. In fact, long-term investors may find opportunities in market fluctuations. Retirees can better handle these market fluctuations and work toward their financial objectives by comprehending the nature of volatility and putting into practice a clear investing strategy that fits their time horizon and risk tolerance.
Impact of Market Volatility on Retirement Portfolios
Market volatility can substantially affect retirement portfolios across diverse asset classes.
For example, while stocks are typically known for their growth potential, they’re inherently more volatile than bonds. That means stock prices can drop sharply during market downturns, which can deplete a retiree’s assets considerably.
And while bonds are considered more stable, they’re not immune to volatility either, particularly when interest rates are rising. Bond prices and returns typically move in opposite directions, so when interest rates climb, existing bond prices usually decrease.
For retirees, this “sequence of returns risk” is a major obstacle and highlights the negative effect of market downturns on retirement portfolios. If a retiree is compelled to take money out of their portfolio when it’s significantly declined in value, they may be selling assets at a loss.
Because repeated withdrawals must be drawn from an increasingly smaller principal, this could have a cascading effect that puts their long-term financial stability at risk.
Strategies for Managing Market Volatility in Retirement
Now let’s look at some strategies for reducing risk to retirement portfolios during market volatility.
First, we believe diversification is crucial. Diversification includes spreading investments over a variety of asset types, such as equities, bonds, real estate, and commodities—thereby reducing the impact of subpar performance in any one asset type.
A fundamental element of diversification is asset allocation; in other words, setting up the ideal combination of stocks, bonds, and other assets according to a person’s age, risk tolerance, and time horizon.
An older retiree may prioritize income and stability and allocate a larger portion of their investments to bonds, whereas a younger retiree may be more risk tolerant and invest heavily in equities.
Another essential strategy is keeping a sufficient emergency fund. During market downturns, this cash reserve acts as a buffer, allowing retirees to pay for living expenses without having to liquidate investments at potentially lower prices.
To sustain the intended asset allocation over time, regular rebalancing by a finance professional is recommended. Rebalancing involves periodically buying or selling assets to restore the intended allocation, confirming that the portfolio remains aligned with the investor’s risk tolerance and investment objectives.
Maintaining a Long-Term Perspective
Retirement savings can be severely impacted by emotional decision-making, such as panic selling during market downturns. This means it’s critical to focus on long-term investment goals rather than responding to short-term market swings.
History has shown us that markets typically rebound from downturns. The long-term trend has been upward, even though recoveries vary in timing and length. By remaining invested and refraining from impulsive decisions, retirees can gain from the potential of long-term prosperity and can weather market volatility.
Consult With a Professional
Do you need help creating a strategic investment plan that can withstand market volatility in retirement?
At Millstone Financial Group, our team of professional financial advisors can offer proactive and flexible guidance for navigating the complexities of market volatility in retirement. Our financial advisors also provide ongoing support, regularly assessing and modifying investment strategies in response to erratic market conditions and individual situations.
Whether you’re retired, planning to retire or building toward retirement, you need a financial game plan! Contact us to discuss strategies tailored to your specific retirement goals.
Schedule a complimentary consultation by calling (732) 385-8544 or emailing [email protected].
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
