How to Manage Risk in an Election Year

Stock markets are unpredictable, but throw in an election year, and that makes things all the tougher on retirement savers. If you're worried, here are some steps to protect your retirement now (and always).

The U.S. presidential election is still months away, but there’s already plenty of speculation about what it will mean for the financial markets — and how that might affect individual investors’ portfolios.

No one can predict what will happen, or if a particular candidate or party’s success will impact investments for better or worse. But uncertainty and change do tend to bring on volatility. (Remember the “Trump Thump” just days after the 2016 election? Global bond markets experienced a $1 trillion loss as investors reacted to the possibility that Trump’s plans for tax cuts and fiscal stimulus could create inflation.)

You’ll likely hear the phrase “stay the course” a lot over the next few months. And that’s typically good advice for those who have plenty of time to bounce back from a major market downturn. But if you’re nearing or in retirement, why not use those nerve-jangling election headlines as a reminder to check your portfolio and prepare yourself for any possible threat to your future security?

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Here are some things to consider:

The bigger the loss, the deeper the pain

If you own a stock that loses 50% of its value, you’ll have to gain back much more than 50% to get back to where you started. For example, let’s say a stock's price starts at $10, and it loses 50%. Now its value is $5. From that point, a 50% gain would increase the value only to $7.50. To get back to the original $10, the stock would need to gain 100% — twice as much as it lost in percentage terms. Recovering from a loss always requires gaining a larger percentage than was lost, and the larger the loss, the more dramatic that difference becomes.

Your stage of life when a crash occurs can be as critical as how far down the market goes

If you’re within a few years of retiring or your retirement is relatively new, you’ll likely have an even more difficult time recovering from a major loss. This is called “sequence of returns risk.”

Retirees typically have two strikes against them: They’re no longer contributing money to their retirement savings accounts, and withdrawals are more costly during a bear market than during a bull market. If retirees depend on their investments for income and keep making withdrawals after a downturn, they could eventually run short on funds.

Your balanced fund might not be as appropriate as you think for your age and situation

Investors often take a “set it and forget it” attitude with their portfolios, but that’s a little like putting on a swimsuit when it’s hot outside and leaving it on even when it gets cold and snowy. In retirement, especially, it’s important that all your assets are properly managed based on both the current environment and your needs and goals.

Using a dynamic risk management system, which picks up signals of volatility in the markets and adjusts an investor’s exposure accordingly, can help stabilize a portfolio through sunny or stormy markets. If the volatility in the market increases, the number of conservative holdings (such as bonds or gold) may be increased. If the volatility decreases, a more aggressive allocation (with more equities, for example) may be in order. So a portfolio mix might be 60/40 at some point, but it also could be 80/20 in a strong market or 20/80 (or even 100% in safe investments) when signs point to volatility.

A comprehensive plan can offer true diversification – and better risk management

A clear retirement road map can help you detect any possible roadblocks and provide a potential detour. Often this is done using a “bucket” strategy. This might include a liquid investment bucket that is actively managed, a guaranteed bucket that provides either guaranteed income or guaranteed protection using fixed indexed annuities, and a tax-managed bucket using life insurance and other strategies to help you keep more of your money. Diversification doesn’t ensure a profit or guarantee against loss; it is a method used to help manage risk.

Politics in this country will always be unpredictable and, based on how things are going so far, 2020 could turn out to be a white-knuckle roller-coaster ride. When it comes to your retirement plans, try to tune out the day-to-day noise and focus on your goals. Take control of what you can.

You don’t have to wait for, ride out, or live with whatever comes your way. There are steps you can take now to better plan for your financial goals.

Investment advisory services offered through Sigma Planning Corporation, a registered investment advisor. Tiarks, Becker, & Hackett is independent of Parkland Securities, LLC and Sigma Planning Corporation. Securities offered through Parkland Securities, LLC, member FINRA/SIPC.

Kim Franke-Folstad contributed to this article.


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.

Nathan Tiarks, Accredited Investment Fiduciary
Owner, Tiarks Financial

Nathan Tiarks is an Accredited Investment Fiduciary and owner of Tiarks Financial ( Nathan has passed the Series 7 and Series 63 securities exams and holds health, life and annuity insurance licenses.