Market volatility is inevitable. After all, the markets are driven not by economic fundamentals, but by emotion. When investors are optimistic, the markets can soar. When investors are worried and pessimistic, the markets can sink — and these mood swings can happen quickly. But none of this needs to derail your retirement plans. Whether you’re already retired or still several years away, taking the right strategic steps can help safeguard your financial security against volatility.
Here are some key strategies to help protect your retirement nest egg from the ups and downs of the financial markets:
- Diversify Your Portfolio
Spreading your investments across different asset classes — stocks, bonds, real estate, etc. — and across a variety of options within those classes, is the first rule of reducing risk. A well-diversified portfolio is less likely to suffer major losses from a downturn in any single market sector. In other words, your mother was right when she told you: “Don’t put all your eggs in one basket.”
- Keep a Cash Reserve
Having a cash reserve or a short-term savings fund can provide liquidity during market downturns. This allows you to avoid selling investments at a loss when the markets are down, helping preserve your long-term wealth. Whether you call it an emergency fund or a rainy-day fund, a general rule is to keep enough cash on hand to cover at least six months of household expenses. Of course, the more cash you can keep in your reserve, the better.
- Stay the Course
Market volatility can be stressful, but making impulsive decisions based on short-term fluctuations can harm your retirement savings. This can be true whether you are still in the growth and accumulation stage of life, and investing mostly in growth stocks and mutual funds, or you are in the income and distribution stage and investing mostly in individual bonds and bond-like instruments. Whether it is falling stock values or soaring interest rates, big or sudden market changes can be scary. But if you know you have the right strategy for your situation, your stage of life, and your retirement goals, often the best recourse is to stick with your strategy and ride out the volatility. If the stress gets to be too much, you may want to talk with your advisor about whether your allocation is right for your risk tolerance level, or if it needs to be adjusted to reduce your risk exposure. In any case, always work with the right advisor when considering any changes to your strategy.
- Maintain a Balanced Asset Allocation
Speaking of reducing risk, as you enter the transitional stage of investing, meaning within ten or so years of retirement, it is important to consider shifting a portion of your investments to more stable and conservative assets, such as individual bonds or dividend-paying stocks. This shift makes sense for the vast majority of investors and can help cushion your portfolio against extreme market swings while still providing growth opportunities.
- Consider Guaranteed Income Options
Individual bonds and bond-like instruments, such as annuities, can provide steady streams of retirement income regardless of market conditions. These options can add a layer of stability to your retirement plan even if you have a higher risk tolerance level and want to continue investing in the stock market in retirement. If your risk tolerance is lower, the Universe of Income Generating Investment options is broad and diverse enough to potentially provide the foundation for your entire strategy. A financial advisor who specializes in these options can work with you to create a customized portfolio of actively managed individual bonds and bond-like instruments designed to generate reliable income return at a fixed rate of interest or dividend while protecting your principal in all market conditions, including periods of extreme volatility.
- Revisit and Reassess Your Plan Regularly
Your financial situation, goals, and risk tolerance level may change over time, so it’s important to review your retirement plan regularly — at least once a year. Make sure you have the right advisor for your stage of life, and work with him or her to adjust your strategy as needed to ensure it continues to align with your needs and goals and keeps you confidently on track toward enjoying a comfortable, stress-free retirement.
Summary
By working with the right advisor to implement and manage these strategies, you can better protect your retirement savings from market volatility and enjoy long-term financial peace of mind. Being proactive and staying educated and disciplined are the main keys to dealing with market volatility and ensuring you’ll enjoy a comfortable and secure retirement!
