By Jeff Gilbert
Retirement is a much-anticipated milestone, but it comes with its own set of financial challenges. One of the biggest hurdles is managing the unpredictable nature of market volatility.
Despite the ups and downs of the market, it’s possible to build a stable retirement by understanding the key drivers of market fluctuations and implementing a clear, strategic investment plan.
In this article, I explore smart, diversified strategies to help you stay on track and safeguard your retirement 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.
Seek Experienced Guidance
Are you looking for a tailored investment strategy to navigate market volatility during retirement?
At Balboa Wealth Partners, our experienced financial advisors offer proactive, adaptable guidance to help you manage the uncertainties of market fluctuations in retirement. We provide continuous support, regularly reviewing and adjusting your investment approach to align with market shifts and your unique needs.
Whether you’re already retired, preparing for retirement, or still building your nest egg, having a solid financial plan is crucial. Reach out to us today to discuss strategies designed to pursue your retirement goals. Give me a call at 949-445-1465 or email me at [email protected].
Scottsdale office: 480-801-5010, [email protected]
About Jeff
Jeff Gilbert is the founder and CEO of Balboa Wealth Partners, a holistic financial management firm dedicated to providing clients guidance today for tomorrow’s success. With over three decades of industry experience, he has worked as both an advisor and executive-level manager, partnering with and serving a diverse range of clients. Specializing in serving high- and ultra-high-net-worth families, Jeff aims to help clients achieve their short-term and long-term goals, worry less about their finances, and focus more on their life’s passions. Based in Orange County, Jeff works with clients throughout the entire country. To learn more, connect with Jeff on LinkedIn or email [email protected].
Advisory services provided by Balboa Wealth Partners, Inc., an Investment Advisor registered with the SEC. Advisory services are only offered to clients or prospective clients where Balboa Wealth Partners and its Investment Advisor Representatives are properly licensed or exempt from registration.