Protecting Your Assets In An Unstable Market

March 17, 2020

In recent weeks, fear and anxiety have taken a toll on markets. Headlines focused on the global pandemic and a price war over oil may have put an end to a very long bull market cycle. While this is concerning to all investors, it is especially worrisome to those who are nearing or living in retirement.

Retirees are more vulnerable to market corrections because most rely on withdrawals from their retirement account to cover expenses. When markets are low, retirees have to sell more shares at a lower price in order to get the same amount of income. Selling shares removes the possibility of those shares recovering in price. Studies have shown that this can have a lasting impact on portfolio longevity.

When panic and fear enter the markets, we are usually told not to react emotionally and to stay the course. While those pieces of advice are true, they sometimes do very little to restore our trust. In order to continue with confidence, here is our guide to surviving market swings.

Create or Maintain a Cash Reserve

Entering your retirement years does not eliminate the need for an emergency fund. During your working years, it is often recommended that you keep at least 6 months’ worth of expenses in cash or cash equivalents. During retirement, you should actually save two to three years’ worth of expenses. This reserve is especially important in times of market uncertainty because it will allow you to cover your expenses while avoiding selling your stocks at a loss. You can create an emergency fund with high yield savings accounts, money market accounts, Certificates of Deposit, and short-term US Treasuries.

Review Your Allocation

While most spend time reviewing their balances, fewer look at their account allocation. Make sure that your portfolio is well-diversified across various asset classes including domestic and foreign, large cap and small cap, as well as a mix of stocks and bonds. It is also recommended that you utilize low-cost investment options to construct your portfolio. 

If you are working with a low-cost well-diversified portfolio, match your tolerance for risk to the amount of risk present in your portfolio. The higher the stock ratio to bonds in your portfolio, the more market risk you are susceptible to. If you become highly anxious or worried over market returns, then a portfolio full of stocks may not be the best choice.

One strategy proven to be effective during volatile markets is known as dollar cost averaging. While it may be counter-intuitive, market corrections can offer buying opportunities. If you have cash or other safe investments that may have not declined in the correction, you may consider using those to fund a brokerage account. Instead of placing all the money into investments immediately, consider taking advantage of dollar cost averaging over a period of time. By making pre-established periodic purchases in this account, you reduce the impact of price volatility.

Guaranteed Income

During down markets, guaranteed income products offer a way to protect your investments. Immediate annuities can be one source of guaranteed income. An immediate annuity is when you provide a lump sum of money to an insurance company in exchange for monthly payment for your life (or for your spouse too).

One approach is to consider how much you need each month for your essential spending. Essential spending includes items, such as housing, insurance, taxes, and food. Then determine how much of that essential spending is covered by Social Security or other guaranteed income, such as a pension. If there is a gap between the guaranteed income and essential spending, you should look to an immediate annuity to cover the gap. The size of the lump sum will vary depending on how much monthly income you need. This will allow you to rely on your market investments for your non-essential spending, such as travel, gifts, and hobbies.

Reduce Spending

If you rely on your investments as your primary source of income, consider reducing your spending to minimize withdrawals from your portfolio. This is where reviewing monthly expenses can be beneficial, especially during declining markets. First, group your expenses into fixed or essential and non-essential buckets. Then, pay close attention to those areas of non-essential spending. This includes travel, hobbies, gifts, and subscriptions such as gym memberships. It may be advisable to look to these areas first as you seek to reduce your spending

When it comes to the essential areas of spending you may be able to reduce costs there as well. This may include your mortgage. Rates have declined where you can take advantage of historically low-interest rates. You can also consider reviewing things such as health insurance and auto insurance costs that typically are big ticket items in your budget.

Part-time Jobs: Remote Teaching and Professional Jobs

Finally, if you simply cannot reduce your expenses, you may consider other sources of income. There are many ways to bring in extra income while still maintaining a great deal of flexibility. 

Consider becoming an online teacher or tutor through organizations like Outschool or where you can teach students remotely. Now that schools have closed, education organizations are looking for thousands of remote teaching positions to fill. Other part-time jobs can include providing professional online services like bookkeeping, answering medical hotline questions, and consulting.

Delaying Retirement

If you have the option to continue working, you may want to consider delaying retirement for a couple of years. By doing so, you not only eliminate the need to withdraw from your portfolio, but you may be able to contribute more dollars into your retirement accounts. Certainly, not everyone has this option but if you do, it is worth considering. If you are feeling burnt out or unable to keep your current pace at your job, even continuing your employment part-time can be a great way to transition into retirement.

Use Financial Tools or Get Professional Advice

Remember in times like these there are many online resources like calculators and professionals who can help. If you need help deciding on an appropriate allocation, withdrawal amount, or any other strategies mentioned above, consider using online financial tools or resources. They are budget-friendly and can provide you quick results at your own time. If you need a professional to speak with, consider reaching out to a Certified Financial Planner or an investment professional who works in a fiduciary capacity, they are bound to put your interest ahead of their own. Market downturns can be unnerving, but by using online tools or contacting a professional, you increase chances of avoiding emotional mistakes and the financial consequences that come with them. 

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