Avoid These Common Mistakes When You Invest for Retirement During Volatile Securities Markets

Many current and future retirees are at risk of making bad financial decisions when the securities markets become increasingly volatile. 

Fear of loss can cause them to make emotional decisions that can severely damage the achievement of their longer-term financial goals. 

This article describes six of the most important disciplines impacting the successful achievement of your financial goals.

The key takeaways from this article include:

  • Why reevaluate your portfolio strategy when approaching retirement?
  • Why stay disciplined during volatile markets?
  • Why are volatile markets buying opportunities?
  • Why doesn’t market timing work over longer time periods?
  • What is your biggest investment risk?
  • Why is diversification your best risk management strategy?

 

Why Be More Conservative When You Are in the Retirement Risk Zone?

Investors should plan carefully in the years leading immediately up to and immediately following retirement.  

Significant losses during this crucial period can impact your standard of living and financial security later in life when you need it the most.

Understanding volatility and the interplay with your portfolio and retirement is critical. Take too much risk and your portfolio may never recover if markets falter. Too little risk and your portfolio may fail to keep pace with your goals and inflation. 

As with most things in life, the key is balance. A well-designed investment strategy should be highly personalized, balancing the ability to sleep well at night and the appropriate level of risk to which there are two book-end perspectives:

  1. What is the least amount of risk required to achieve my goals?
  2. How much risk can I take without risking it all?

In most cases, the answer is somewhere in between, shifting over time as needs and goals evolve.

 

Why Stay Disciplined During Volatile Markets?

While easier said than done, try your best to minimize emotions when investing. Let’s call this rational investing, which is the opposite of emotional investing.

Proceeding in a direction that is counter to your emotions is oftentimes the right approach. Successful investors manage their emotions well, taking an opportunistic approach when markets are “on sale”. 

Most investors with longer time horizons are generally better off riding out downside volatility.  

No one has a crystal ball, but historically speaking, it has paid well to stay invested.

 

Why Are Volatile Markets Buying Opportunities?

Investors should consider volatile markets as potential buying opportunities. 

A general market decline will impact great companies as well as those with weaker outlooks. 

As previously mentioned, your emotions may be strongly suggesting you sell, but if a company has solid fundamentals, market corrections may be an opportunity to acquire shares at reduced values. All things being equal, if you liked a stock enough to buy it at $100 per share then purchasing it at $75 per share is even more attractive.

 

What Is Market Timing and Why Doesn’t It Work Over Longer Time Periods?

Many investors like to believe it is possible to time the market.  They preach selling at cycle tops and buying at the bottom. For such a strategy to be successful, investors must consistenly know where tops and bottoms occur. 

At face value, this theory holds water. Unfortunately, it is exceedingly rare that investors time the market successfully, no matter what your friends might tell you at dinner. One good timing decision does not represent a successful and consistent track record.  

History tells us that timing the market is an indicator of luck, rather than a thoughtful, consistent approach. Not to mention, it’s generally a strategy with a higher tax bite.

 

What Is Your Biggest Investment Risk?

Your biggest financial risk is not market volatility. Given enough time, portfolios can recover from any temporary declines that may occur.

We all know the securities markets go up and down based on a variety of economic conditions that impacts the market outlook . While past performance is never a guarantee, the good news is that (historically speaking) markets go up more than they go down. This has been true since the origin of the securities markets. If long-term market participants didn’t buy into this belief, markets would represent little more than a place for speculators to gather like the casinos of Las Vegas. Rational investors demand performance, rewarding those investments that deliver on or exceed expectations.

Having a plan and understanding the tradeoffs of different financial decisions is truly the key. What are the important, essential decisions that will really drive financial success? Am I saving enough to retire or send my kids to college? Is my current level of spending sustainable? Is my portfolio appropriately invested with my tolerance for risk?

Each goal has a specific time horizon. The longer the time horizon the easier it will be to stomach market swings along the way. 

 

Why Is Diversification Your Best Risk Management Strategy?

Why Is Diversification Your Best Risk Management Strategy?You have heard the old saying: “don’t put all of your eggs in one basket”. From an investment perspective, this means you don’t limit your investments to one asset class, such as large-capitalization domestic stocks. 

You want to do just the opposite. Proper diversification can help improve the consistency in overall, long-run performance, which is especially important for retirees living off their portfolios. Too little diversification and your portfolio is less likely to have the long-term staying power needed to support a successful retirement. 

Again, diversification is an important part of any investment strategy. During volatile market conditions, it becomes increasingly important to minimize the risk of large and what are essentially permanent losses for those drawing on their portfolios for retirement. 

Diversification is crucial in your path to avoid the “bad egg”.

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Carolyn Galfione, CPA, CFP®

Carolyn Galfione, CPA, CFP®

Carolyn Galfione is the Managing Director and a Senior Wealth Advisor at Linscomb & Williams.

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