Less Volatility Equals Greater Reliability in Retirement Portfolio

Chasing high market returns is always a risky proposition, and if you're approaching retirement, it could be a losing one as well.

The typical stock investor tends to pay far more attention to how much money can be made in the market than how much potentially could be lost.

That makes sense. If you weren’t optimistic about growing those investments, why would you take the risk?

But if you’re going into the market assuming your returns will be the same or better than the S&P 500 every year, you’re likely to be disappointed.

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Wall Street firms and business media pundits like to pound out the message that investing in the stock market is the only way to go if you want to build real wealth. But the earnings they tout don’t necessarily apply to average investors, who have to pay fees, trading costs and other expenses on their investments.

Unless you’re the type of investor who likes digging through a prospectus, those costs can be easy to miss. If you invest in a mutual fund with a 1% expense ratio, for example, you’ll pay $100 per year for every $10,000 invested. That might not seem like much, but over the years, it can really eat away at your returns. Moreover, actively managed mutual funds tend to have on average 1.44% per year (opens in new tab) in unpublished trading costs.

Then there’s your silent partner, Uncle Sam, who will want to be sure to get his share in taxes. (You can pay him now or later.)

And, of course, some investors can be their own worst enemy.

According to the research firm DALBAR’s latest Quantitative Analysis of Investor Behavior (opens in new tab) (QAIB), investors lost 9.42% over the course of 2018, compared with a 4.38% loss by the S&P. And that isn’t all that unusual. Over the 30-year period, from 1997 to the end of 2016, while the S&P 500’s average annual return was 10.16%, the average mutual fund equity investor’s return was 3.98% (opens in new tab).

Much of that difference, DALBAR says, can be blamed on chasing performance and bad decisions based on emotions.

The fear of loss leads many investors to sell at the worst possible time and move their money to cash and other investments. Then, when the stock market is up again, they get back in — following the crowd and acting too late to take advantage of low prices that could have given their portfolio a boost.

And the cycle repeats.

Why It’s Time to Be Vigilant

We’ve just gone through a great decade with the stock market. But there’s no predicting what will happen next — and we can’t be sure the next decade will be as strong for stocks. If you look at the history of annualized returns for U.S. stocks, some of the best decades have been followed by some of the worst. The 1920s were followed by the Great Depression of the 1930s. The prosperous ’50s were followed by the sluggish ’60s. And the worst decade on record, the 2000s, was bookended by the ’90s and 2010s — two decades that had very strong growth (opens in new tab).

For those in or near retirement, the possibility of a bear market means extra vigilance is in order.

Market fluctuations are a distraction when you’re young or even middle-aged and still building your retirement savings. But with time and continuing contributions, investors usually can make back their money after a correction or downturn — and perhaps even benefit from a drop in prices.

If you’re drawing income from your retirement accounts instead of contributing to them when a downturn occurs, however, it can devastate your portfolio and your plans. You are essentially reverse dollar cost averaging. Your investments won’t recover as quickly — if ever — and you could run out of money much sooner than you thought.

Take Some Steps Toward Safety

The less risk in or near retirement, the better. That means shifting to investments that can protect your principal and provide reliable income. If you keep money in the stock market — which is likely as most investors require some protection against inflation — it’s essential to also have funds you can access without having to sell those stocks at a low.

It’s also important to be proactive about the “hidden” costs of the equity funds in your portfolio. Talk to your financial professional about tax minimization strategies. Choose funds with lower fees and expenses. Try to keep your emotions in check to avoid selling when the market is down.

And always evaluate investments for expected volatility as well as the expected return.

A degree of caution is always a good thing when it comes to investing — but it becomes crucial when you’re ready to retire. Those who plan ahead will be in a better position to reach their goals and maintain their lifestyle no matter what happens to the market in the future.

Kim Franke-Folstad contributed to this article.

Investment advisory services offered through Singer Wealth Advisors Inc., a registered investment advisory firm in the State of Florida.

All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

This content is designed to provide general information on the subjects covered. It is not intended to provide specific investment advice and should not be construed as advice designed to meet the particular needs of an individual’s situation.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Keith Singer, CFP, Attorney
President, Singer Wealth Advisors

Keith Singer, owner and president of Singer Wealth Advisors (www.singerwealth.com (opens in new tab)), is a CERTIFIED FINANCIAL PLANNER™. His firm, Singer Wealth Advisors, is an SEC-registered investment advisory firm. Mr. Singer is also a licensed Florida attorney. He is the host of the radio show "Prosper! With Keith Singer," which currently airs on five stations in South Florida.