Orignally published on 2021-12-04 19:32:00 by www.marketwatch.com
The stock market is a roller coaster this week — and not everyone likes roller coasters, especially when they cause retirement account balances to drop.
The ups and downs are due in part to the fears surrounding the omicron variant of COVID-19 and the U.S. economy (the number of people applying for unemployment jumped from a 52-week low around Thanksgiving). On Thursday, stock indexes slightly rebounded at the market’s open, but investors paying close attention to their retirement accounts may have seen their balances drop lower and lower the days before.
Financial planners typically suggest investors should avoid checking their retirement accounts too often — especially when the market is jumpy — but that can be hard for some individuals, especially if they’re not comfortable with investing or they’re close to their retirement years. Losses can — or at least appear to — lower the chances of sustaining retirement security.
Here are a few things you can do if you’re within a decade or so of retirement and can’t stomach the volatility:
Check your asset allocation
During a downturn is not usually the time to make changes to your investment portfolio, but if a slight tick downward is causing excessive stress, it can be a good time to check your asset allocation and how it aligns with your risk tolerance.
Risk tolerance and risk capacity are two very separate, but important, concepts when making a portfolio. The first relates to the risk someone is comfortable having in their accounts — for example, someone who goes to the Las Vegas casinos and doesn’t mind major losses at the blackjack table has a high risk tolerance — whereas risk capacity is tied to how much risk a portfolio can or should allow for to meet the individual’s goals. The two are not always in sync, and people who are worried about their portfolios should talk to a financial planner who can help adjust the portfolio during the appropriate moment, or find ways to accept the ups and downs.
“Everyone is different and good investment strategies need to account for this,” said Howard Pressman, a certified financial planner and partner at EBW Financial Planning. “The last 10 years or so have lured investors into a false sense of comfort and many people who are not suited for aggressive investing portfolios are, in fact, invested this way.”
Consider the bucket strategy
A financial planner takes into account all income streams expected in retirement, and implements a strategy for investments that encompasses risk tolerance as well. “For example, we find out how much predictable income the client will have such as Social Security and pension income, what their expenditures are for both fixed and discretionary expenses and then invest accordingly,” said Michelle Gessner, a certified financial planner and founder of Gessner Wealth Strategies.
Then she breaks it down further: living expenses in the short-term, such as the next two years, have the most conservative investment strategy of all the assets; living expenses between years 3 and 5 have a “more moderate strategy” and everything else is more aggressive, which will help fuel long-term needs.
“When the market dips, our clients are not worried, because they know that markets recover in two to three years (or less) and they have money that is conservatively invested that they can use while they wait it out,” she said. “This strategy helps our clients avoid making mistakes caused by unnecessary anxiety.”
Some advisers have also suggested having a year or two’s worth of living expenses in cash, which is easily accessible and allows investments to remain untouched completely during volatility. Other advisers use more than three buckets when investing retirement assets.
Remove yourself from easy access
Most retirement investors, especially those who don’t need to access the money immediately, should avoid checking their accounts too frequently. Make it as difficult as possible to check all the time, said Paul Fenner, a certified financial planner and founder of Tamma Capital. “Remove apps from their phones, remove websites from their favorites,” he said. “Anything that takes an extra step or two to access their accounts, individuals may feel like it’s not worth the effort.”
Make a plan for when to check your accounts
Changing perspectives can also help people worried about their retirement savings during downturns.
“Some of the stress comes from looking at things with the wrong level of ‘zoom,’” said Jennifer Grant, a certified financial planner at Perryman Financial Advisory. “When you invest in the market, are you looking at it on a daily, weekly or monthly time frame? When you make a plan, are you reviewing it on a weekly, monthly or yearly time frame?” How often one checks on a goal should match the duration to reaching that goal, she said. “If you are planning for a vacation, then you need to review your budget daily or weekly,” Grant said. “When you are planning for retirement that will start when you are 65 and last 35 years, this requires a different zoom level.”
Keep perspective of the losses
Seeing any losses when logging in is unpleasant, but assess what that loss means in the big picture. “Losing $10,000 in a month sounds like a lot of money, unless you have a $1 million portfolio and then it is 1%. Will a 1% cause you to not be able to retire on time?” Grant said. “I think this is where people close to retirement really feel pain. Their accounts are close to the maximum they will ever be before they start taking funds from them to live on.”
Go into investing and volatility with reasonable expectations and guidelines for when to review portfolios.
Investors may associate losses with big-ticket purchases, such as losing a certain amount of money that they could have spent on a new car.
“They could also make that much money, but that is not as memorable,” Grant said. “Over the course of their adult life, they know how much effort it takes to buy a new car and to think they could lose it that quickly is hard. This is where perspective and zoom level come in.”