Don't Let Market Volatility Derail Your Portfolio: This Is the Key to Investing Success
You're only human, but managing your emotions during market volatility — especially during retirement — is crucial for maintaining a stable portfolio. And as the midterms approach, now is the time to check in on your risk tolerance.
The age-old advice of "buy low, sell high" seems simple enough to follow, and it is — except when the market tosses out surprises and emotions kick in.
We watch as stock prices plummet and something inside calls out, "Sell now, before it's too late." Of course, at that point it already is.
Or the market soars and that inner voice says, "Buy now and catch this wave." But the wave may have already crested.
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Humans are human, which means if we aren't careful, emotions can replace logic when market volatility comes into play, causing us to make financial moves we later regret.
We saw this in 2020. When the pandemic began to affect markets, some people grew nervous and moved their money into the safety of money market accounts. By the end of the year, when the market had recovered and they had missed out on the gains, they lamented that move.
One thing we can count on is that there are always events that can lead to market volatility. Wars. Natural disasters. Government shutdowns. Unexpected election results.
During this year's midterm elections, depending on how people react to the results, the market could soar, plummet or hold steady. (Interestingly, the market tends to do well, on average, after a midterm election, although that doesn't mean every midterm election has proved favorable for investors.)
We can't control market volatility. But what retirees can do is have an investment portfolio that is suitable for this stage of life and that matches their risk tolerance. That way, they are in better shape to withstand market swings.
With the right investments attuned to their needs, they won't see as many large fluctuations as they would with a high-growth portfolio, and they will feel more comfortable with what they do experience.
Gauging risk tolerance
Among the problems retirees face with volatility is that they may not have time to recover when the market tumbles. Younger clients may have a 20- or 30-year time horizon, so a loss today isn't as worrisome because they have decades to recover.
Retirees, who often are withdrawing money from their accounts to live on, even as the value drops, are in a rougher spot. For example, after the 2008 financial crisis, it took more than five years for the S&P 500 to fully recover.
Still, that doesn't mean your situation is the same as everyone else's. One of the keys to building a portfolio is to look at all of your assets and determine how to invest them in the most efficient way.
If you are working with a financial professional, the more they know about your complete financial picture, the better. Much like a doctor, they can advise you based only on what they know.
An effective strategy many retirees use is to divide their investments among different investing buckets with different levels of risk that accomplish different goals.
When doing this, you first want to make sure your income is taken care of. That's the bucket with safer investments that will pay for your current living expenses.
After that, other buckets with different time horizons can be more aggressive because you don't anticipate needing to use that money anytime soon.
Once again, though, your risk tolerance comes into play. How much risk are you taking, and how do you feel about that risk? At our firm, Retirement Solutions Group (RSG), we use specific tools and technology to help our clients identify their risk tolerance. We determine what their pain points are so we can allocate investments appropriately.
It's not unusual for a husband and wife to have different results on the risk questionnaire, with one more conservative than the other. In those situations, it's important to get them on the same page so they are both comfortable with the investing decisions.
Helping you set aside the emotions
Market volatility always has been and always will be a possibility, and no one has a crystal ball to predict when the going might get rocky.
That's why it's important to have a financial professional you can speak with about any concerns you have, someone who can help you separate emotions from investing decisions and who understands your needs.
With the right person in your corner, you can build a portfolio where you will feel comfortable regardless of market ups and downs.
Ronnie Blair contributed to this article.
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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