What is Market Volatility?
When an investor transitions from the workforce to retirement, they take a leap of faith that the assets they’ve accumulated will be enough to recreate their income each month. We often find ourselves in a bout with market volatility and down markets, and it’s important to remember that bear and bull markets are nothing new. The goal of this article is to explain what market volatility is and provide some ideas for investors that would allow them to retire confidently, with peace of mind, even in a volatile market.
Market Volatility: Defined
Market volatility refers to the rapid and unpredictable price fluctuations of stocks, bonds, or other assets in the financial markets. For beginner investors, it means that the value of their investments can go up and down quite dramatically in a short period. Understanding and managing this volatility is crucial, as it can impact the overall performance of their investment portfolio.
During a potential stock market crash, many investors second guess their plans to retire and reconsider or change their timeline in response to the market.
Source: Dow Jones Industrial Average
How does Market Volatility affect Retirement?
Let’s take a look at an example. 2022 saw a grave amount of volatility, mainly due to issues with high inflation leading to an increase in interest rates. Many investors were at a loss of what to do to protect their investments or where to put their safe shares to hopefully capture some of the market’s bounceback. Many pre-retirees aren’t interested in high risk investing to accumulate wealth, and find themselves more concerned about finding low risk investments to help preserve their wealth.
For investors who were hoping to retire in 2022 and closely watching the stock market news, many were approaching that decision with doubt and uncertainty because of the volatile market. Conventional wisdom of how to hedge against market risk, like leveraging less turbulent investments like bonds, didn’t necessarily apply because the bond market was also in bad shape.
Many pre-retirees are unaware of the sequence of returns risk which, if not properly protected against, can cause them to outlive their dollars simply from retiring during a down market and not taking steps to hedge against market volatility. The current state of the volatile market can create anxiety around the decision to retire and even force investors to postpone their retirement because of the uncertainty and the fear that it might get worse if they don’t have any safe shares or low risk investments.
How do I deal with Market Volatility?
One solution to hedge against sequence of returns risk in bear and bull markets alike is to reposition one’s assets into different buckets that they can draw from in different market cycles.
One bucket focuses on high risk investing to capture the full market upside. A second bucket contains low risk investments that are designed to preserve principal and capture some market upside. Alternative investments can provide downside protection in times of market volatility, and often have a beta less than 1 – not as volatile as the overall market. These provide some form of safe shares in investors’ portfolios that they can rely on when everything else is down. Holistic planning can position investors well for retirement in any kind of market conditions, including the potential of a stock market crash.
How a Financial Advisor can help:
There are several different types of wealth managers who are considered financial advisors under the securities and exchange commission. Most investors recognize CERTIFIED FINANCIAL PLANNERs™, but beyond that designation, people find it’s often confusing to find the right advisor for their needs.
Other advisors only provide asset management services or transactional planning. Some investors find it difficult to differentiate between high risk investing and wealth accumulation strategies that are designed to grow your assets, but protect your principal. Working with a holistic advisor or CFP can help with planning AND implementation of strategies.
These advisors focus on using safe money strategies and work in a long term capacity to guide retirees through the critical first few years of retirement. They give investors more control over their retirement timeline and peace of mind that they’ll be able to retire in any market conditions, especially during extreme market volatility.
This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. This article is the sole opinion of this individual and is not indicative of the firm’s belief. Projected savings presented may vary depending on client longevity, and performance of assets over time.
