How Retirees and Retirement Savers Can Navigate the Market Tumult

by Andrew Welsch

Whether you’re in or near retirement, or saving for a retirement that seems a long way off, today’s blend of surging inflation and market volatility poses problems that can be unsettling for even seasoned savers. For older investors, downturns threaten to diminish the ability of savings to last as long as needed, while inflation promises to pare future purchasing power. For younger savers, the unfamiliar dynamics could drive them away from investing at what could be the worst time.

Yet it’s hard to blame individual investors for being uncertain. Risks abound: Federal Reserve interest-rate hikes to combat rising prices, the Russia-Ukraine war, supply-chain snafus, midterm elections, and more. Markets have dropped—and then tumbled further. The Dow Jones Industrial Average is down about 10% year to date, while the S&P 500 index has fallen 15%, and the Nasdaq has tumbled 25%. The price of Bitcoin has been more than halved since its peak of about $67,802.30 in November, and now stands around $30,000.

Even traditional havens aren’t working well. “This is probably one of the few times, if ever, in someone’s investing life that either gold or fixed income isn’t a safety net,” says Dan Ludwin, president and founding partner at Salomon & Ludwin in Richmond, Va. He notes that the iShares Core U.S. Aggregate Bon exchange-traded fund (ticker: AGG)—a common bond-market benchmark—is down about 9% year to date. “Normally, people expect a little bit of a zigzag in their portfolio, and it’s just zagging right now.”

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But it doesn’t need to be—and indeed shouldn’t be—all doom and gloom, say financial advisors. For older savers or those in retirement, now may be a good opportunity to make small changes to a portfolio—and to remind oneself of the value of sound financial planning. And although older investors have more experience dealing with portfolio-eroding market shocks, younger investors have a critical advantage: time. If you’re 40, say, you probably have about 25 years until retirement—plenty of time for the markets to recover and resume their long-term growth trajectory. During that period, you can keep costs down by dollar-cost averaging and benefit from compound returns.

Advisors say investors of all ages may have good opportunities to invest now and make tactical changes to their portfolios. The key is to do so prudently, which means ignoring fads like meme stocks, crypto, and options trading, and brushing up on the basics. It also means understanding that investments could fall further before rebounding, as markets grapple with an uncertain economic environment.

Focus on Fundamentals

Times like the present underscore key tenets of financial planning. So, before younger investors start or add to their nest eggs, they should set aside an emergency fund to cover three to six months of living expenses. Doing so in an online savings account—rather than in a bricks-and-mortar bank—can bring a higher yield on those funds while keeping them accessible.

Advisors also suggest that retirees and older investors maintain enough cash or liquid assets to cover a year of living expenses. Ludwin’s firm goes further, suggesting that clients keep two to three years of “lifestyle cash” on hand so that they can cover their needs in down markets without having to sell stocks. “What we always tell people is that the worst mistake you can make is being forced to sell into a declining market, because every dollar you sell in the market is a dollar that’s never going to recover,” he says.

For clients looking to earn more from the fixed-income part of their portfolio or from emergency funds, Series I savings bonds are an option and can be bought directly from the federal government via the TreasuryDirect.gov website. They earn interest based on combining a fixed rate and an inflation rate, but investors need to hold I bonds for a year and are limited to purchasing $10,000 worth of them each year. Their current rate is 9.62%, good through October 2022.

“In December, when inflation started increasing, I had clients buy $10,000 worth, and then another $10,000 in January,” says Colin Overweg, a financial planner and founder of Advize Wealth Management. “I don’t know where else you can find an emergency fund yielding 8%.”

Jeremy Sharp, financial planner and founder of Redeem Wealth in Gilbert, Ariz., suggests that investors consider rebalancing their portfolios if they haven’t already done so—taking profits in holdings that are up and adding to beaten-down positions. “One of the custodians we use is Betterment. They do daily rebalancing,” Sharp says of the robo-advisor.

Buying the Dip

It may also be an advantageous time to buy the dip, as market declines can mean cheaper valuations for stocks and better opportunities for investors, provided they don’t stretch themselves too thin, advisors say. While younger investors have time on their side, they also need a plan—and one they can stick to. Jumping out of the market at the wrong time or trying to time the market can lead to damaging errors. “If you miss the best day in the market in a year, it can have a big impact on your portfolio over the long term,” says Barry Gilbert, vice president of research at LPL Financial. “Sometimes, the best day is right after one of the worst days.”

Kyle McBrien, a financial planner at Betterment, suggests that new investors who are reluctant to buy the dip with a lump sum try to invest in increments. “You can dollar-cost average,” McBrien says. “Whether it’s once a week or once a month, you can put a little in at a time, and you’re still investing in a structured way and taking the emotion out of it.”

Dips can also be buying opportunities for long-term investors, says Douglas Boneparth, an advisor and owner of Bone Fide Wealth in New York. They can give investors a chance to add to current positions by buying when prices are low—a move that helps lower the average cost of owning a security.

 


Normally, people expect a little bit of a zigzag in their portfolio, and it’s just zagging right now. ”

— Dan Ludwin, president and founding partner at Salomon & Ludwin


 

Still, investors should know that buying the dip in a falling market could mean deeper losses that could take awhile to recover. “Don’t try to just put cash in and hope it pans out in the next six months or so,” says Frank Paré, a financial planner and founder of PF Wealth Management Group in Oakland, Calif. Paré says that if retirement investors have extra cash to invest—excluding what’s required to cover living expenses—then they could add to their investments, but he cautions them to “diversify, diversify, diversify.”

Salomon & Ludwin regularly takes some profits as the market rises in order to have cash on hand to deploy in downturns. For instance, when the S&P 500 recently fell 15% below its all-time high, it triggered a buy signal for the firm. Ludwin says that means buying stock ETFs: large-cap, mid-cap, and small-cap U.S. funds, as well as developed and emerging international markets.

This year’s market slide may present tactical opportunities to rejigger portfolios, as well. Investors with concentrated positions—for example, shares of their employer’s stock— could sell some to better diversify their portfolio and avoid a bigger tax hit than they would have before markets tumbled, says Advize’s Overweg. “When the market is down, it can be a good time to sell concentrated positions with lower capital gains and then diversify,” he says.

Investors can also use this moment to convert a traditional individual retirement account to a Roth IRA. Roths allow you to contribute after-tax dollars, but you don’t pay taxes on withdrawals during retirement. That’s the opposite of a traditional IRA, which allows you to make pretax contributions and then pay taxes on withdrawals. A conversion triggers a tax hit, but given market declines, the consequences may be less severe, says Overweg, who is based in Los Angeles. “This is not timing the market, but it is an opportunity for tax savings,” Overweg says.

Selecting Investments

So, what to invest those retirement-plan savings in? Target-date funds may be appropriate for first-time investors who prefer a set-it-and-forget approach, advisors say. Investors can pick a fund that corresponds to their expected retirement year. Over time, the fund automatically shifts its allocation from primarily equities to a mix of stocks and bonds.

For young investors, “that can be an appropriate strategy for their age, especially if they aren’t comfortable setting up something a little more nuanced,” says Sheila Shaffer, a financial advisor at Janney Montgomery Scott in Washington, D.C.

Target-date funds’ fees are also falling, making them more attractive. The average asset-weighted fee for target-date funds fell to 0.34% in 2021, down from 0.37% in 2020 and 0.51% five years ago, according to a recent report from research firm Morningstar .

Older and more sophisticated investors, however, might want to consider a variety of strategies and asset classes.

Value vs. Growth: Investors may also want to tilt part of their equity allocation toward value stocks, which over the past decade have lagged behind growth stocks.

“If you don’t have value in your portfolio, today is a sharp reminder of why you should think about getting some,” says Evelyn Zohlen, president of Inspired Financial in Huntington Beach, Calif. She says research shows that value investing can perform well over the long term, though that doesn’t mean investors should eschew growth entirely.

UBS financial advisor Michael Zinn says while his team has a tilt at the margins toward value stocks, a balanced approach is required, given economic uncertainty. “We think having a blend of high-quality tech, secular growth, makes sense because of that recessionary risk. But we also want to battle inflation with some commodity-driven but great value companies,” the New York–based advisor says.

Expanding Exposure: GenTrust has been adding some commodities exposure for clients who previously weren’t invested in real assets, says Javi Sanchez, an advisor at the Miami-based firm. As of May 1, a standard 60/40 portfolio was down about 12% year to date, while the same portfolio with a 5% allocation to commodities was down only about 9%, he says.

After Russia’s invasion of Ukraine, GenTrust anticipated a shift in energy away from fossil fuels, so it has been moving more toward clean-energy investments and uranium, which is used in nuclear power generation, Sanchez says.

Fixed Income: Investors may also want to carefully review their fixed-income investments in light of the changing interest-rate environment. Zohlen says she has been using Treasury inflation-protected securities and I bonds in client portfolios, though they have drawbacks, including the investment limit.

Investors could also look to short-term duration bonds. Greg Ghodsi, a financial advisor at Raymond James Financial, says his team has been “way overweight for one-year or under bonds for retiree clients” for several years, eschewing bonds with longer maturities. Duration risk measures a bond’s price sensitivity to interest-rate changes. “You may have a phenomenal opportunity as those bonds mature to reinvest at two or three times the yield of 60 days ago,” says Ghodsi, who is based in Tampa, Fla.

Zinn says he uses utility stocks in conjunction with fixed income in client portfolios, adding that they can be an inflation defender because utilities typically raise their dividends each year. Zinn says his team invests in individual utility stocks, and cautions that his approach requires due diligence and research, looking for companies that have good relationships with their regulators. “We’re interested in regulated utilities [that are] paying consistent dividends and raising those dividends 3% to 5% per year,” he says.

Bitcoin: Although investors have been regularly asking Paré about cryptocurrencies, he hasn’t recommended that they invest in what he sees as a speculative investment. Bitcoin’s dramatic fall in recent months has only reinforced his skepticism.

“I think people can get the right returns without going that far out on the risk/reward spectrum,” says Paré, an advisor since 1996. “I wouldn’t tell people to buy on the dip. That’s for sure.”

Those with an eye to history will note that while this year has so far been an eventful one for investors, markets have experienced worse. And all bear markets come to an end. To stay the course, it’s best to focus on what you can control, advisors say. “Knowing your limitations and how much you can spend makes a big difference on whether you can meet your goals,” Redeem Wealth’s Sharp says.

And Paré suggests that investors avoid paying too much attention to daily market swings, saying, “It’s best to turn off the TV if you can.”

Write to Andrew Welsch at andrew.welsch@barrons.com

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