Paul Tarins, RICP®,WMCP®,CSRIC™
You’ve been saving and investing diligently and now retirement is finally here. You may be at the end of the working stage of your life, but the investing stage continues.
How is it different from pre-retirement?
The biggest change is that you’ve probably shifted from a focus on growth and accumulation to one of preservation and income. This means avoiding one of the biggest threats to your nest egg — volatility. Since you don’t have time to recover from big market drops, and a lowering of portfolio values may impact your income stream, avoiding volatility is one of the keys to preserving your assets.
We go through some strategies that may help you mitigate the effects of volatility on your portfolio.
Keep Diversifying Your Portfolio — Just Shift Your Risk
If you’ve been investing, you probably have a diversified portfolio already. However, your asset allocation was likely set up to track a more aggressive risk target, so your first step is to go through a comprehensive portfolio rebalancing. This is more than your annual review; you want to review each of your holdings from a point of view of how much they are likely to be impacted by volatility.
A measure of a given stock’s volatility relative to the broader market is called “beta”. A beta of 1.0 indicates that a stock’s volatility is parallel to that of the market. A beta above 1.0 means that the stock will have greater volatility than the market. For example, small cap stocks are generally higher beta — they have the potential to outperform in a bull market but will pay a higher price in a bear market. You might want to remain invested in them, but to mitigate the risk tradeoff, shift a portion of your portfolio to large cap stocks, as they are more representative of the overall market.
Focus on Income — Whether Dividend Stocks or Fixed Income
Adding income-generating investments can create cash flow you can use for expenses. For example, fixed-income investments that offer additional yield can ensure you have a reliable source of funds and don’t have to liquidate stocks into a falling market during a downturn. Shifting your equity allocation into more dividend stocks that pay a steady income can help generate cash flow, but also may reduce the impact of volatility on their share prices.
Keep More Cash on Hand
Since you don’t have a salary to rely on if a big expense comes up, it’s a good idea to shift into a higher cash allocation. While a pre-retirement allocation is generally 5% or less, in retirement the goal is to ensure you can meet expenses without disrupting the investments that can provide your income stream. This can mean keeping as much as five years’ worth of expenses on hand in cash. In a bear market, the stable value of the cash can go a long way towards preserving your portfolio’s value.
Staying Invested Is the Name of the Game
Avoiding volatility is a good strategy to maintaining the value of your retirement investments, but it has other benefits. While you may have felt more comfortable prior to retirement riding out a bear market, once you are retired, it can be very stressful to resist the temptation to liquidate investments when stock prices fall. This is usually an attempt to prevent further losses, but it will also prevent you from the possibility of recovering. Incorporating some volatility-mitigating investments may help you stay invested for the long haul.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.