It can be very tough investing in retirement. When you retire you get a big pot of money called a 401(k) (or TSP, or other qualified retirement plan), and you have to manage it wisely to last you the rest of your life (and your spouse’s life if you’re married).
For most people this will involve investing it. Perhaps even investing a portion of it in the stock market. The stock market can be volatile. No one can perfectly predict it. And if you are not an investing expert, you will often doubt your own buy/sell decisions.
We all have a tendency to look at short-term market results and draw conclusions from them:
If you buy a stock and 3 months later it has increased 25%, your reaction is “Man, I’m a genius!”
If you buy a stock and 3 months later it has decreased 25%, your reaction is “Man, I’m an idiot!”
The good news is you’re probably not an idiot. The bad news is you’re also probably not an investing genius. Few are.
The market is erratic in the short-term. Ben Graham (and he had many great quotes) once said:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
In the long-term a well thought out, good investment strategy is better. In the short-term even some bad ideas can show good results by sheer luck.
Conclusion: Always think long-term when it comes to investing in retirement.
Let’s look at some short-term market movements from just 2016.
Britain voted to exit the EU in June 2016. So many people said the stock market would crash. The sky was going to fall. So what happened? Here’s a shot of the S&P 500 from Google Finance:
The market went down briefly and then rebounded and grew some more. If you had sold out before Brexit you would have felt like an investment genius. Until of course the market rebounded and grew an additional 7.5% by October 2016.
The beginning of 2016 started off horribly. From January to the depths of February the S&P was down approximately 9%. Here’s what it looked like:
Then the market rebounded. Again, if you had sold out at the beginning of January you would have felt like an investment genius by mid-February. Of course, until the market went on to grow and exceed where it started on January 1st.
Retirees and Investing: Some Lessons
This doesn’t mean that it was necessarily a bad long-term idea to reduce your exposure to some equities before Brexit, or even at the beginning of 2016 before the early year drop.
The point I’m making is that the short-term results are just short-term results. They don’t necessarily mean you are making good long-term investment decisions.
Decisions on when to buy and sell securities in the market should be made based on a disciplined investment strategy. It is wise to consider many factors, such as the strength of the economy, the momentum of a security, the fact that securities can return to their averages if they are growing too quickly, and other factors.
Sometimes a good investing strategy will yield short-term results that are not always positive. Like Ben Graham said, in the long-term the market will weigh out the strength of your investing strategy.
So here are 3 takeaways retirees should follow when investing:
#1: You need an overall investment plan
There are a couple of things that go into a defined investment plan. For example, what is your annual returns expectations? 5%, 7%, 9%? The higher your expectations the more risk you must take.
What is your time horizon? I believe you should plan for a time horizon that lasts at least until you are age 90… unless you know something about your health that will prevent you from living long. It’s better to plan for your investments to last a long time and not need them to, as opposed to not planning for them lasting a long time and then finding yourself living to a ripe old age with no savings left.
What type of risk are you willing to take with your portfolio? What is the maximum drawdown you can stomach?
Remember, if you can’t stick with your investment plan because you can’t handle the market fluctuations, you are more likely to abandon the plan due to short-term market results.
What types of investments will be in your portfolio? How will you allocate between equities, bonds, commodities, cash, REITs, etc.? If you don’t want to take as much risk, you will likely want to have less exposure to more volatile investments like equities. If you are more conservative you may want to have a bigger allocation to bonds.
There are more things to consider. But if you considered these factors alone, wrote down your answers and stuck to them, you’d be far ahead of the average retiree who has probably never been this specific about their investment methodology.
If you don’t do this, you may want to seek the services of a financial advisor to have it done for you.
#2: Take care of your income needs
The purpose of most people’s investment portfolio is to help them supplement income from Social Security and their pension (if they have a pension).
One way to help take pressure (and stress) off of you when you look at your portfolio’s performance in the market, is to make sure you have your income needs met with lifetime income. There is a comfort that comes with knowing you can cover your monthly expenses even if your portfolio is down in the short-term.
Not only is having this peace of mind a good thing in and of itself, it also helps you to stay on track with your investment plan and avoid making rash buy/sell decisions because you are overly worried.
#3: Allocate your portfolio properly – You’re not a kid anymore
Lastly, allocate your portfolio properly. For most people when they retire portfolio protection becomes much more important.
This means most retirees do not invest as aggressively once they retire (and even as they approach retirement in 5 to 10 years). Remember, (and I tell this to my clients) this is money you cannot replace once you retire. Yes, it is good to get growth out of it. But it’s not usually in the retiree’s best interest to take on too much risk to chase after a few extra percentage points of gain.
Most retirees want to know their money is working for them, enjoy some good investing, and be able to fund a comfortable retirement. Most are not interested in taking on unnecessary amounts of risk in their portfolios just to get a slightly higher return. Most are not interested in exposing themselves to too much risk.
The name of the game at this stage of life is preserving what you have worked hard for, managing it wisely, so that you can have a good life and make a positive impact on the world.
Hope that helps. And for further help, be sure to check out my free e-book “Top 7 Investor Mistakes Baby Boomers Make With Their Portfolios… And How To Help Avoid Them.”