Imagine you’re on a busy road, behind someone who’s driving erratically. He might be drunk or on the phone, eating a burrito or physically ill. You have no idea. All you know is you want to get around and pass his car as quickly as possible.
But every time you think you’ve managed to pull far away, you spot him in your rearview mirror. His unpredictable maneuvers don’t seem quite so menacing anymore, because he’s behind you now — but it’s still a concern, and something you need to keep an eye on.
That’s how investors, especially those in or near retirement, should be looking at volatility in the markets. You might think you’re safe — after all, 2008’s drastic market drop is long behind us. But the risk never really goes away. As we’ve seen recently, the market is unpredictable; you can’t know if or when volatility will pull up alongside you again and push you off the road. So, you have to keep an eye out and protect yourself by being proactive.
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Here are some steps to take now:
1. Make sure you understand how your portfolio is diversified.
Often, prospective clients come to our office thinking they have a moderate or even conservative portfolio, but when we do an analysis, we find that isn’t the case. Sometimes, the risk is extremely high — perhaps because their portfolio manager has adjusted the percentage of stocks or exchange-traded funds to meet the higher expectations that come with a bull market.
We know investors get eager to rev things up when they think others are passing them by. But while those higher returns are tempting, the market can’t go up forever. Bonds are also at risk right now, in what appears to be a rising interest rate environment. And if your money is mostly in mutual funds, redundancies can add to your risk.
Your portfolio should be built around your individual situation, not a standard mix that’s based only on your current age or a target “number” you think you need to have to retire. Considerations also should include your budget, your Social Security benefits and pension, and your short- and long-range goals.
2. Look at alternative investment strategies and vehicles.
Because we’re in this historically high-equity economy and historically low interest rate environment, it’s like the perfect storm. Consider changing things up a bit, perhaps by using a long/short strategy to minimize your exposure — taking long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. And talk to your adviser about alternative products, like annuities, that aren’t directly tied to the market to further diversify your portfolio.
3. Think about using an active and passive investment approach.
Passive management — where an investor or financial adviser makes investments for the long term and is not influenced by short-term market fluctuations — has been successful for some time now. But as volatility rolls into view again, you might benefit from using both active and passive strategies.
Active portfolio managers watch for market and industry trends, changes in the economy and political landscape, and factors that may affect specific companies. More trading can result in more fees and higher taxes, so active management should be appropriate for the assets you have. But when things get shaky, this more vigilant approach may help to protect your money.
It can be challenging to alternate your focus from the returns in front of you to the risk that’s creeping up from behind, but in retirement, it’s crucial. If a stock market downturn occurs in the years just before or after you retire, the damage to your portfolio — and your future security — could be irreparable.
Caution is key. Always keep your destination in mind as you maneuver through the market’s many twists and turns. Make sure you’re working with an adviser who uses products and strategies that can keep you safely on a course to outpace inflation, avoid high taxes and reach all your retirement goals.
Kim Franke-Folstad contributed to this article.
Advisory services offered through Lake Point Wealth Management, LLC, an SEC Registered Investment Adviser. Insurance products and services offered through Lake Point Advisory Group, LLC.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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