It’s no secret 2022 has been a challenging year for investors. Of course, if you’ve been investing for a long time, you’ve seen other periods of market volatility. Still, when you’re retired and possibly already drawing on your portfolio for income, it can feel unsettling to see drops on your investment statements. Should you be concerned? And how should you respond?
Actually, you may be more prepared to handle a downturn than you think. Your financial strategy is designed taking into account that market declines do happen. If you’ve built a portfolio containing an appropriate mix of stocks, bonds and other investments based on your goals and risk tolerance, you’ve got a good foundation to help you withstand a down market and prevent it from disrupting your long-term financial strategy.
In fact, every investment within your portfolio has a purpose, helping provide for your income needs today and over the long term.
ADA description: Within your portfolio, cash and short-term fixed-income investments can help provide near-term income. Intermediate- and longer-term bonds and fixed-income investments can help provide medium-term income. And stocks and growth investments can help provide long-term income.
Still, regardless of how well you’ve constructed your investment portfolio, you may be tempted to “do something” in response to this year’s market volatility. Here are five ideas to consider:
1. Hit the “pause” button before making changes. Most of us would like to take action to reduce stress in other areas of our lives, so why should investing be any different? And if you’re retired, a market downturn can feel particularly disconcerting. But you might not want to automatically change your portfolio or your investment habits. Keep in mind that market declines are normal — in fact, we experience about a 20% decline, known as a bear market, on average every four years.*
Instead of making changes for the sake of change, ask yourself: “Are my long-term goals still the same?” If the answer is “yes,” then why overhaul a financial strategy that’s designed to meet these goals? If you’re feeling particularly anxious about the markets, you may have been taking on more risk than you’d like, in which case you may want to review your investment mix. But remember that risk and reward go hand in hand: You’ll want to ensure you’re taking the appropriate amount of risk to achieve your goals. And during your retirement years, you’ll need a portfolio that can help you stay ahead of inflation.
You and your financial advisor have created a portfolio designed to support your financial goals. But sometimes life happens. Markets go up, and down. You hear the Joneses next door or your co-workers are getting better returns and you think you could too if you do something. Here’s the thing though. Doing something may be the wrong thing. Doing something may take you off track especially when the something doesn’t align with your recommended investment strategy.
So when markets decline—because they will—remember that your portfolio was already built to help weather those changes over the long term. Those investors that stayed the course after the 2008 crash with well-diversified portfolios that were rebalanced when needed, typically did better than those who cashed out and came back a year later.
Sometimes people think they can time the market—getting out of stocks and getting into cash and bonds—at just the right time. The problem with trying to time the market is you never really know when you are at the highest high or the lowest low. You could guess correctly and get a better return, or you could guess incorrectly and come out with a lower return than if you had just stuck to your portfolio design—the portfolio that you and your advisor created together designed to support your financial goals.
When you hear the Jones’ next door are getting better returns—maybe they are, and maybe they aren’t. But you should remember their goals or how much they started with may be different. They may need a more aggressive strategy which means higher risk. If that works for them, great. They may have more time to recover from market downturns. But using their investment strategy to build your portfolio may put your goals at risk. You need to remember your portfolio is crafted for you, and what you need.
Which is not to say that you need to settle. Edward Jones assesses the market and looks for opportunities that align with your investment strategy; opportunities that we expect can potentially deliver even better returns while balancing your portfolio’s risk. And when we find them, we can help you take advantage of those opportunities in your portfolio. So the next time the Jones’ tell you about their hot new stock and their great returns, congratulate them and smile, knowing that you already have a portfolio designed to help get you to your goals.
The best thing you can do when life is happening or markets change? Unless your goals or circumstances have changed, stick with your investment strategy. And if you’re not sure, call your financial advisor. Edward Jones has seen plenty of ups and downs, and we can support you through all of them. And those Joneses? Don’t worry about them. When it comes to investing, you’ve got Edward Jones.
2. Spend from your cash. During a downturn, you might be tempted to sell stocks. But remember, stocks are there to provide for your long-term income needs. Your cash and short-term fixed income are there to meet your near-term income needs. As part of our retirement income guidance, we recommend retirees' have about a year’s worth of income needs from your portfolio in cash, as well as another three to five years’ worth of income needs from your portfolio in CDs and short-term fixed income. Use these sources, as well as other income sources such as Social Security, to meet your retirement spending needs, allowing your stocks to recover.
3. Look for opportunities. A sharp market decline doesn’t just present challenges — it also offers potential opportunities. A downturn may be the time to rebalance your portfolio as necessary, using it as an opportunity to add more to your stocks when they are down in value. If you don’t have enough cash on hand to both meet your spending needs and rebalance your portfolio, look at your budget to see if you can adjust your spending and build your cash reserve over time.
4. Review your withdrawal rate. When you retired, or perhaps shortly before, you may have determined how much you could afford to withdraw each year from your investment portfolio without running the risk of outliving your money. Ideally, this annual withdrawal rate should be fairly conservative: We generally recommend an initial withdrawal rate equal to 4% of a portfolio’s value for someone retiring in their mid-60s, with an annual increase of 3% for inflation, though everyone’s situation is different. But what if your portfolio’s value drops 20%? If you made no changes, your 4% withdrawal rate would actually be 5%, which may be higher than you’d like. Should you consider any changes?
There’s no one right answer. If the decline is of relatively short duration, you may not need to change your withdrawal rate. But it’s impossible to predict when a market downturn ends and the next market rally begins. If you can afford to do so, you could consider forgoing your annual increase or even temporarily lowering your withdrawal rate by reducing your spending.
5. Review your reliance rate. Your reliance rate tells you how much you rely on your portfolio — rather than other sources, such as Social Security — for your living expenses. For example, if you need $80,000 a year and $60,000 comes from your portfolio, your reliance rate is 75% (60,000 ÷ 80,000). The higher this rate, the more exposed you are to market volatility and downturns.
One way to help lower your reliance rate is to invest in an annuity, which can provide a lifetime income stream that isn’t subject to movements in the stock market. An annuity isn’t appropriate for everyone, so before investing in one, you’ll want to consult your financial advisor.
To discuss these ideas or other concerns you may have about the current market environment, talk with your financial advisor. The markets will always be on the move, but in the long run, you have the most control over your financial future.