Financial markets always move up and down over the short term.
During your working years, you may feel that you have time to overcome this volatility. And you’d be basing these feelings on evidence: the longer the investment period, the greater the markets tend to “smooth out” their performance.
But what happens when you retire? Won’t you be more susceptible to market movements?
You may not be as vulnerable as you might think. Given our growing awareness of healthier lifestyles, you could easily spend two or even three decades in retirement — so your investment time frame won't necessarily be that compressed.
Nonetheless, time may well be a more important consideration during your retirement years, so you may want to be particularly vigilant about taking steps to help smooth out market volatility's effects.
Here are a few suggestions:
• Allocate your investments among a variety of asset classes. Proper asset allocation is a good investment move at any age, but when you’re retired, you want to be especially careful that you don’t “over-concentrate” your investment dollars among just a few assets. Spreading your money among a range of vehicles — stocks, bonds, certificates of deposit, government securities and so on — can help you avoid taking the full brunt of a downturn that may primarily hit just one type of investment. (Keep in mind, though, that while diversification can help reduce the effects of volatility, it can’t assure a profit or protect against loss.)
• Choose investments with demonstrated solid performance across many market cycles. As you’ve probably heard, “past performance is no guarantee of future results,” and this is true. Nonetheless, you can help improve your outlook by owning quality investments. So when investing in stocks, choose those with actual earnings and a track record of earnings growth. If you invest in fixed-income vehicles, pick those considered “investment grade.”
• Don’t make emotional decisions. At various times during your retirement, you will, in all likelihood, witness some sharp drops in the market. Avoid overreacting to these downturns, which will probably just be normal market “corrections.” If you can keep your emotions out of investing, you will be less likely to make moves such as selling quality investments merely because their price is temporarily down.
• Don’t try to “time” the market. You may be tempted to “take advantage” of volatility by looking for opportunities to “buy low and sell high.” In theory, this is a fine idea —unfortunately, no one can really predict market highs or lows. You’ll probably be better off by consistently investing the same amount of money into the same investments. Over time, this investing method may result in lower per-share costs. However, as is the case with diversification, this type of “systematic” investing won’t guarantee a profit or protect against loss, and you’ll need to be willing to keep investing when share prices are declining.
Joe Faulk is a Crestview financial adviser.