Protecting your retirement funds during volatile markets or in the case of an unanticipated event can be particularly troubling for people about to retire or already retired. A market downturn like that of March and April of this year depleted retirement savings to the point that many seniors were concerned about their ability to continue to meet their retirement goals, including maintaining their retirement lifestyle. In times of volatile markets or when unexpected events negatively impact savings, a financial advisor can provide perspective and reassurance and help adjust your retirement strategy.
Consider this recent occurrence: A couple with a large enough portfolio to feel very comfortable about their retirement were concerned about the turbulence affecting the markets. They were heavily invested in U.S. stocks, and not used to seeing all that red after years of steady growth. They needed to buy a car and called for advice on how to finance it—that is, should they use cash from their account or take out a car loan? They were earning between 4 and 6 percent on the cash, and could get a car loan at 4.5 percent. We advised them to take out the loan, which they could get at 4.5 percent, instead of draining their account of $75,000 in cash. Having that extra cash in their account afforded them more flexibility. Without the cash, they would have left themselves at risk of having to sell stocks down the road at depressed prices to cover expenses. You can’t predict when stock prices will recover or how long that will take, so we agreed that retaining a substantial cash balance in their portfolio was in their best interests. Just talking through the options gave the couple comfort they were making a sound decision.
Lessons from the pandemic
During the COVID-19 pandemic, when stock prices plummeted, clients were fearful and wanted to sell. “I just want to stop the bleeding” was something we heard often during those months. What was important was determining what would make them comfortable, what they could do to move on from the fear trap while preserving their investments, keeping up with their expenses, and staying on track with their retirement goals. The adjustments we made involved converting some investments to cash and increasing their allocation of fixed income investments, such as short-term Treasury bills, then leaving the rest of the portfolio in place.
Rotation, alternatives, and cash
Many investors have a great deal of exposure to large cap stocks, like the Magnificent 7, which have driven the market higher in recent years. As opposed to panic selling, one way to hedge against the risk of the recent extremely volatile market is to rotate a portion of those assets into stocks that do better in times of market stress, like healthcare, utilities, and consumer staples. As well, we use so-called “alternative” investments, like real estate and private equity and credit, that are not only less affected by market turbulence but produce income.
Regardless of current market conditions, we like clients to have enough cash between their portfolios and bank accounts to cover 12 to 24 months of expenses. During COVID, we were able to assess the risk tolerance of our clients, and we adjusted their assets when times were better to accommodate their risk tolerances. The strategies we use reflect market realities but also the personal financial situation and temperament of each client. Things always change, which is why it’s important to have a working relationship with an advisor.
Everyone is different with their own goals and needs, but typically for retirees, the majority of the portfolios they’re living off of, or getting ready to live off of, should be in fixed income, cash, and cash-like equivalents like CDs and money market funds. You might take some losses in your 401(k) or IRA and pay the taxes to put that money into fixed income. A portion needs to remain in growth-oriented investments to accommodate inflation and avoid eroding your spending power, but what you will need for your living expenses should be in fixed income and cash.
Cash is king.
You should have an adequate amount of liquid reserves in your portfolio, cash, cash-equivalents, short-term Treasuries, and other short-term, highly liquid investments, that can be converted to cash quickly with minimal risk of value fluctuation. At end of the day, cash is king, and the bigger cash and cash-equivalent position you have the more flexibility you have, including being able to purchase equities at bargain prices.
We’re here to help. Call us with your questions or concerns about your retirement savings and goals at 239-919-1268; or email me at DNWilliams@hbksweatlh.com.
Important Disclosures
The information and examples included in this document are for general, educational, and informational purposes only. It does not contain any financial or investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any financial or investment advice. If you would like financial or investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy, or allocation (including those recommended by HBKS Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy, or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
