A big part of investment success is how you manage emotions during market volatility
A screen displays stock charts while a trader works at his post on the floor at the New York Stock Exchange. Photo by Brendan McDermid/Reuters files In my work with families who are approaching, or already in, retirement, I find one of the biggest rewards is helping them stay on track to achieve their retirement goals when markets get volatile.
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We now have the good fortune of enjoying a more extended lifespan, meaning people are living longer into their retirement, which has made retirement planning more important than ever. Guaranteed income streams from defined-benefit pension plans are no longer available to most people and more and more retirees will rely on their investments to supplement the income they need.
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After years of building and accumulating wealth, the focus when approaching retirement shifts to the preservation and extension of wealth. That means having a retirement portfolio with the right balance of investments that generate income, preserve capital and provide some long-term growth so the portfolio lasts as long as it needs to.
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A big part of investment success is how you manage emotions during market volatility, or how you keep your eye on the big picture. Volatility — the inevitable ups and downs in the financial markets — is a normal part of investing, but keep in mind markets historically recover their losses and go on to achieve new highs over time.
It is an adviser’s job to guide clients through times of volatility and help them stick to their long-term plan to achieve their retirement goals. Here are three strategies for retirees to consider in a volatile market environment.
Formulate a suitable investment strategy, stick to it during bad times and don’t deviate from it during good times. Emotions can drive markets to extreme highs and lows. The latest mania was in the technology sector and was fuelled by ample liquidity and ultra-low interest rates. Market bubbles eventually burst, and it is difficult to know when, so it’s best to not take a speculative mentality when investing or to try to time the markets.
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Understand that market volatility is normal and maintain a long-term focus. Have a strategy that can help you navigate through a recessionary period by understanding your income requirements from investments. Consider layering your income through a combination of cash reserves, dividends and interest income as well as guaranteed income.
Recommended from Editorial David Rosenberg: These economies are best positioned to withstand rising interest rates Investors need to leave the past in the past and focus on doing the right thing in the present Five winning investments in 2022 and their prospects ahead Stocks listed on the benchmark S&P 500 index have been able to grow dividends by six per cent per annum since 1960, double the rate of inflation during the same time period. Historically, stocks are more resilient in keeping up with inflation than bonds since bond payments are fixed until maturity.
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Article content Depending on your needs, goals and risk profile, growth-oriented investments such as stocks may have an important place in your retirement portfolio because they can help you keep up with inflation and mitigate capital erosion.
There is no one-size-fits-all advice for managing retirement portfolios, but understanding the unique attributes of different investment types and having a defined income strategy can help ease your mind.
Develop a deeper appreciation of your investment objectives and remember there are always trade-offs when making investment decisions. Higher return objectives are most often associated with higher risks of uncertainty. But don’t forget to communicate your concerns with your advisers and revisit your retirement plans to better understand how market volatility impacts your objectives.
Rita Li is an investment adviser at RBC Dominion Securities.
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