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Prepare Yourself: Volatility is Back, Probably Indefinitely


By , with Annuity FYI

Global trade issues and rising rates are obviously vexing issues, and the former can be as troublesome as the latter. Trade wars can threaten the fundamental premise behind the increasingly healthy U.S. economy…

Life in retirement, at least the financial aspect, would be less stressful if you could just load up with annuities with lifetime income guarantees and live comfortably ever after — immune to the sharp, often nerve-racking fluctuations of the financial markets, especially the stock market.

Alas, this is an unrealistic scenario, regardless of the heft of your financial assets, because annuities are non-liquid investments. You have to balance your annuity portfolio with liquid investments, typically stocks and bonds, and we’ve been reminded in 2021 that these aren’t predictable performers. The stock market has been very strong but bond prices have deteriorated, a reflection of rising inflation and notice by the Federal Reserve that it will likely increase interest rates in 2022.

Will bond prices continue to fall in 2022 and might the stock market follow them downward? And if so, how best to cope?

The answer is that 2022 could be a difficult year for the markets, largely because the overall growth rate, while still positive, is widely expected to decline amid Fed rate hikes and the fact that the stock market already sits in the stratosphere. 

“The stock market’s strong gains in 2021 are unlikely to see a repeat in 2022,” a Bank of America market analyst said in a note to bank clients toward the end of the year. “We are on the cusp of a policy pivot from pro-growth to anti-inflation.”

Rising interest rates in 2022 would represent the third “shock” confronting investors since early 2020, following the advent of the pandemic and a sharp rise in inflation in 2021, sparked by severe supply chain disruption and surging commodity prices. Moreover, more shocks could be on the way. The Covid-19 pandemic, for instance, could easily take another negative turn.

As usual, some market watchers says things aren’t as dire as suggested. They say the market has already priced in what is likely to happen and that small upside surprises could keep the market rising. They also note that American consumers have been all-stars throughout most of the pandemic, despite recent declines in consumer confidence. They’re unlikely to pull back much in 2022, bulls say, given that the economy is still in the early stages of a growth cycle. 

True, economic growth is expected to slow from about 6 percent in 2021 to 4 percent in 2022. Still, it’s important to bear in mind that, with the exception of 2021, this is well above the average annual growth rates in recent years. 2021 registered the most growth in decades only because of a surprisingly sharp rebound in the economy following a pandemic-induced recession.

So what should retirees do? As usual, they should play the longish game and stick with their annuities and continue to invest at least some of their additional funds in the stock market — assuming, of course, they have the psychological fortitude to withstand the ups and downs of the market. 

Some tinkering might be in order. Investors should make sure their investment strategy still makes sense and review its performance. This can educate investors about how their portfolio might fare in a steeper downturn, such as a bear market, and help them cope with volatility by providing a better picture of might lie ahead. This is important because all successful long-term investors have learned how to psychologically stay the course and weather the trauma of steep, albeit temporary, market declines.

Here some additional tips: 

  • Remember that volatility is a normal part of investing, triggered by a wide assortment of events. Astute investors learn to enjoy the ride – at least over time – by staying diversified, rebalancing their mix of stocks and bonds, and, most important, by sticking with a plan.
  • Monitor the performance of your mutual funds and ETFs during the last difficult period – in this case, the early months of 2020. This offers a sense of how your funds perform under pressure and whether you should stick with or replace them. As an example, aggressive growth funds, which typically invest inordinately heavily in pricey technology high-flyers such as Apple, Facebook and Google parent Alphabet and usually decline more in a downdraft, may not agree with you after all. At minimum, compare how your funds performed against their benchmark.
  • Consider periodically parking a piece of your usual stock market exposure in cash so that you have dry powder to buy more shares in the wake of a selloff. It may not be a way to buy low, but it is a way to buy lower.
  • If you have a conservative bent, consider replacing some of your stock funds with so-called low-volatility funds, which typically invest in bonds and commodities as well as stocks. Just be aware there is a price to be paid in mitigating the occasional roller coaster: long-term appreciation. These funds seldom compete with all-stock funds when the market is rising. But if you sleep better at night with some low-volatility funds in your portfolio, they make sense for you.
  • If market downturns unnerve you more than average, you can also purchase balanced funds. These invest in both stocks and bonds, typically at roughly a steady 60/40 split. The latter buys stocks when valuations are attractive and buys more bonds when stocks get pricier.

If you do your homework, you’ll be in good shape to weather the storm when it comes. And, in any case, if you’re an annuity owner with guaranteed lifetime income, as many are, you’ll have less to fret about than those without. That’s why you bought an annuity in the first place.

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