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Navigating Market Volatility in Retirement

By Angela Dorsey

Retirement is a long-awaited milestone, but it often brings a unique set of financial challenges. Among them, managing market volatility can be one of the toughest. Even in the face of unpredictable market shifts, it’s possible to work toward a stable and fulfilling retirement by understanding the key drivers of market volatility and putting a well-thought-out investment strategy in place.

In this article, I explore effective, diversified strategies to help you navigate these challenges and stay on track during volatile market conditions.

Understanding Market Volatility

Market volatility is the fluctuation in the price of a security or market index over a given period. Simply put, it measures frequent and significant price changes in financial markets.

Market volatility is an inherent characteristic of financial markets. A number of variables, including economic growth, inflation, interest rates, geopolitical events, and investor sentiment, have caused market cycles of ups and downs throughout history.

Although it can cause anxiety, volatility is not always negative. In fact, long-term investors may find opportunities in market fluctuations. Retirees can better handle these market fluctuations and work toward their financial objectives by comprehending the nature of volatility and putting into practice a clear investing strategy that fits their time horizon and risk tolerance.

Impact of Market Volatility on Retirement Portfolios

Market volatility can substantially affect retirement portfolios across diverse asset classes.

For example, while stocks are typically known for their growth potential, they’re inherently more volatile than bonds. That means stock prices can drop sharply during market downturns, which can deplete a retiree’s assets considerably.

And while bonds are considered more stable, they’re not immune to volatility either, particularly when interest rates are rising. Bond prices and returns typically move in opposite directions, so when interest rates climb, existing bond prices usually decrease.

For retirees, this “sequence of returns risk” is a major obstacle and highlights the negative effect of market downturns on retirement portfolios. If a retiree is compelled to take money out of their portfolio when it’s significantly declined in value, they may be selling assets at a loss.

Because repeated withdrawals must be drawn from an increasingly smaller principal, this could have a cascading effect that puts their long-term financial stability at risk.

Strategies for Managing Market Volatility in Retirement

Now let’s look at some strategies for reducing risk to retirement portfolios during market volatility.

First, we believe diversification is crucial. Diversification includes spreading investments over a variety of asset types, such as equities, bonds, real estate, and commodities—thereby reducing the impact of subpar performance in any one asset type.

A fundamental element of diversification is asset allocation; in other words, setting up the ideal combination of stocks, bonds, and other assets according to a person’s age, risk tolerance, and time horizon.

An older retiree may prioritize income and stability and allocate a larger portion of their investments to bonds, whereas a younger retiree may be more risk tolerant and invest heavily in equities.

Another essential strategy is keeping a sufficient emergency fund. During market downturns, this cash reserve acts as a buffer, allowing retirees to pay for living expenses without having to liquidate investments at potentially lower prices.

To sustain the intended asset allocation over time, regular rebalancing by a finance professional is recommended. Rebalancing involves periodically buying or selling assets to restore the intended allocation, confirming that the portfolio remains aligned with the investor’s risk tolerance and investment objectives.

Maintaining a Long-Term Perspective

Retirement savings can be severely impacted by emotional decision-making, such as panic selling during market downturns. This means it’s critical to focus on long-term investment goals rather than responding to short-term market swings.

History has shown us that markets typically rebound from downturns. The long-term trend has been upward, even though recoveries vary in timing and length. By remaining invested and refraining from impulsive decisions, retirees can gain from the potential of long-term prosperity and can weather market volatility.

Seek Advice to Shield Against Market Volatility

Are you looking for a strategic investment plan that can withstand market volatility in retirement?

At Dorsey Wealth Management, our experienced fee-only financial advisors provide proactive, flexible guidance to help you navigate the challenges of market fluctuations. We offer continuous support by regularly reviewing and adjusting your investment strategies based on market changes and your evolving needs.

Whether you’re already retired, planning for retirement, or working toward it, having a solid financial strategy is essential. Reach out to us today to explore personalized strategies that align with your retirement goals. Schedule a free introductory 30-minute phone call.

You can reach us at (310) 370-7776 or angela@dorseywealth.com.

About Angela

Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER® professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.