How smart retired people manage assets during volatile markets

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How smart retired people manage assets during volatile markets
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If you are retired, you have probably been a little anxious over the last 6 months watching your investment accounts get whipped around by this crazy market. My experience tells me that volatile periods like these are difficult for almost every investor. But if you are retired, the pressure is ten times greater.

That’s because as a retiree you depend on your assets rather than your job to pay your bills. And when the market trashes your accounts, it’s difficult to avoid panicking.  

There is no way to erase all the risk from investing.  But I can share four smart tactics you can use to make sure you’re on the right track with your investments and to help you stop worrying.  Let’s get to work…

Read more: 8 ways to avoid going broke in retirement

Shift your focus

If you want to safeguard your assets, start by putting your emotions in a box and make your financial decisions based on reason alone.

The best way to make rational financial decisions is to arm yourself with the facts and think long-term rather than get caught up in the moment. I know that when the market is in a free fall, all you want to do is stop the bleeding. I get that. Nonetheless, I implore you to think a little more long term even when it’s difficult to do so. Here’s why.

According to IRS actuary tables, a 65 year old can expect to live another 20 years. And if you are a married couple (both age 65) there is a 45% chance that at least one of you will live into your 90s!

That said, you have to think long-term and invest accordingly in order to maximize your retirement income over the long run. That usually includes having at least some of your retirement money invested for growth – even though it can be scary at times to do so.

In other words, it doesn’t matter what’s happening to your account today, this month or even this year. What matters is that you have the right long-term investment allocation to safely protect your money while you create the retirement income you want.

Adjust your asset mix

If you are like most retirees, you have a mix of equity funds (mutual funds, index funds and/or ETFs which purchase stocks) and fixed income (mutual, index funds and/ ETFs that buy bonds). Theoretically, as you put more money in equity your returns go up. But so does your risk. That’s why many investors have a mix between the two – they want the benefits of potential growth that equity provides while enjoying the relative lower risk that bonds offer. This is known as asset allocation and it’s the classic trade-off between risk and reward.

The question is, what is the right mix for you? The answer to this question depends on your age, income needs, net worth and risk tolerance. But if you’ve become unsettled lately by the market volatility, it might be time to review your mix and possibly reduce exposure to the more volatile stock market.

Now, here’s the thing. The optimal time to adjust your asset mix is NOT when the market is under duress. That’s because, when the market is volatile, your emotions run high but stock prices are low. Instead, consider waiting to rebalance your accounts until the market stabilizes. Then, adopt an asset allocation you will be comfortable with during good and bad markets – and stick to it.

This one tactic has been a game changer for James, a friend of mine in Arizona. In 2008, when the market plunged more than 40%, his accounts took a pretty sharp haircut. Unfortunately, this was right after he retired. James was frightened and itching to pull all of his money out of the market once and for all and stick it in the bank. But he adjusted his asset mix instead to a 50-50 split between equities and bonds. This was a good move because it reduced volatility going forward.

Of course he didn’t get the full upside when the market snapped back. But he was able to stick with his plan in the years ahead and he avoided pulling all the money out – which would have been far more costly.

Scrutinize your holdings

Once you adjust your mindset to think long-term and tweak your asset allocation, your next task it to make sure your current holdings have earned the right to be in your portfolio.

Many people like to buy and hold their funds. I understand the logic of this and there certainly are benefits to this approach. But there are downsides to this tactic as well. I’ve met people who bought funds in prior years when they were performing well but held on too long. If you hold on to funds that are dogs, that will drag your performance down over time.

And what’s also worrying is that weak funds can significantly underperform when the market is in a correction. Talk about pouring salt on a wound.

Even if you buy index funds or ETFs you still need to watch their performance. That’s because indexes come in and out of favor all the time. For the last several years the S&P 500 has been the place to be – but it probably won’t always be that way. Look at the S&P 500 vs a European index from 1-1-2004 through 12-31-04:

How smart retired people manage assets during volatile markets

You can see that the European fund (represented by the black line) made almost 10% more during 2004 alone. I am not saying this is going to happen again in the near future. But we know based on the past that markets gain and lose strength all the time. This is why it’s important to evaluate your funds each year and adjust.

And don’t forget the importance of costs in this mix. Purchasing funds that have low costs are crucial to seeing the most return from the funds you’ve chosen.

Read more: The #1 tip to help maximize your 401(k) investing

Planning

By far, the most important step to take when the market is rocky is to revisit your financial and investment plan – and here’s why. When markets are weak, it’s very tempting to head for the hills and put everything under your pillow or in the bank for safekeeping. But as I suggested above, that short-term solution may jeopardize your long-term financial goals. It might feel terrific in the short-term to pull out of the market and put all your savings in the bank. But with today’s interest rates, will it ever grow enough to help you achieve your long-term goals? Likely not.

Your long-term plan keeps your focus – you guessed it – on the long-term. The good news is, you can even run a plan by yourself. It doesn’t take that long and it’s not all that difficult. 

Conclusion

When the market has you losing sleep, it’s time to take action. Increase the odds of making better decisions by putting your logic at the helm and keeping your emotions in the brig. Also, make sure you have the right asset allocation and that your funds are still performing. Finally, review your financial plan. If you don’t have one, create one.  This will help you remain focused on the things that matter rather than the over-reacting to short-term disturbances.

It’s tough to be a retired investor during frightening periods in the market. By taking the steps I’ve outlined above, you can reduce the fear and the chances of making a big mistake with your retirement nest egg.

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Neal Frankle About the author:
Neal Frankle is a Certified Financial Planner in Los Angeles. He is also the chief editor of WealthPilgrim.com, MCMHA.org and CreditPilgrim.com. His mission is to help people have "No money worries. No matter what." He achieves that through his writing, webinars, books and working with clients.
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