BY CHRIS JORDAN
Here we go again.
Stocks have recently experienced higher levels of volatility over concerns of a slowing global economy and a potential change in the Federal Reserve”™s monetary policy. It is big, weighty issues like this that cause anxiety and have many local investors questioning the path ahead.
This is especially true for workers thinking about retiring in the near future. As you get closer to your last working days, it”™s nearly impossible not to worry when the news is peppered with stories of stocks plummeting. As you likely know, the markets react to a lot of different factors in the short term ”“ some logical, some not so much. The difference between how individual investors fare versus how the markets do over time is behavioral. By resisting the urge to react to short-term events and focusing on long-range goals, investors can avoid making some bad decisions.
The question ”“ “What should I be doing with my money?” ”“ is something advisers hear every day. In times of big swings it is critical to stay focused, informed and have a plan that makes sense for you individually.
One of the first things to consider is whether you are a long-term investor or a short-term trader. The vast majority of pre-retirees are long-term investors that have company 401(k) plans, pensions, home equity and Social Security benefits that all factor into determining a realistic strategy before leaving work behind.
If you are not a trader, create a plan that includes defining your short-term, intermediate and long-term monies and apply some common sense. Naturally, “how much in each segment” requires some homework.
Thinking of being retired for potentially 30-plus years can paralyze even the best-intentioned person. Create a budget of your monthly expenses and break out what is fixed and what is discretionary. Then consider your immediate sources of income like Social Security and any pension or other income. Should you have a shortfall that must be compensated for with savings, you can create a one- to three-year reserve that includes very conservative accounts. This way you are drawing down on assets that are not likely to see the swings that your stock portfolio might be experiencing. Said another way, don”™t sell while prices are down.
Asset allocation focuses on where your investments are but doesn”™t consider when you need them. Once retired, you”™ll need to consider how you”™ll take money out of your accounts and why. Clearly, everyone”™s circumstances are different, but by having a road map you can help avoid the big mistakes. During the 2008 financial crisis many long-term investors without a solid plan completely bailed on their stocks, selling into the decline. While it may have temporarily made some feel better, many missed the recovery. Trying to time the markets, or get in and out at the right time, is not something you can expect to do and neither can the experts.
While global growth may indeed be slowing, it is not tanking, either. Soon-to-be retirees need to realize that people are living longer. Therefore, the chance of outliving your money is a very real threat. Inflation, health care costs and taxes must be considered, too. People need to recognize that with interest rates near historical lows, holding government bonds and certificates of deposit may not produce the needed yield.
Finding new ways to generate solid income without overreaching will be key. Today there are more diversified and alternative strategies available within exchange-traded funds and mutual funds that provide a wider array of investments. Some options specifically seek to manage risk and others look to play into the inevitable changes in the markets. For example, investors might consider taking select risk in areas like high yield bonds that can potentially do well amid modest growth. Considering rising interest rates, investors could look at floating rate funds that can benefit from higher rates for a portion of a portfolio.
Stocks certainly aren”™t cheap these days, but focusing on downside protection through high-quality global dividends can be attractive as you consider retiring. Understanding your options and positioning your portfolio for slower growth is a smart step you can take right now. In the end, the market gyrations are here for the long haul, so make a plan that considers all these factors and when you need your money. A well-thought-out personal strategy will help you stay on track and feel more confident as you look forward to retiring.
Chris Jordan is president and CEO of Lexco Wealth Management Inc., the wealth advisory firm he began in 1999 that now features a Tarrytown headquarters and 11 branch offices, including one in Greenwich on Holly Hill Road and one in Farmington. Contact the Tarrytown office at 914-332-4350 or the Greenwich office at 203-622-4910.
