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’re being reminded his year that these are not predictable performers. The strong, steady rise of the stock market in 2017, with no meaningful pullbacks, was an aberration.
So what lies ahead in 2018 and beyond – and, most important, how best to cope if rocky episodes remain a fixture on the financial landscape?
This seems inevitable, given, among other things, rising global trade friction, especially with China, and the virtual certainty of a string of more Federal Reserve-orchestrated interest rate hikes to come. Rising rates erode the value of bonds and are always a challenge for the stock market.
It’s beneficial if you have some sense of what may lie ahead for the financial markets – and why — for the rest of the year.
Businesses are heavily favored by the legislation, with the corporate tax rate cut to 20% from 35% and, unlike individual tax cuts, made permanent. But Republicans say that the tax overhaul is also intended to immediately cut taxes for about 70% of middle-class families.
What does this mean, specifically, for seniors and retirees?
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 – all major global economies are strengthening in sync after roughly a decade of economic woes. If outside factors don’t intervene, this is about as good as it gets.
Even if this issue is resolved, however, there is the sticky interest rate challenge. Every time interest rates creep up, bond prices fall. And those rising rates – specifically, higher rates on new bonds – compete better against potential stock investments. Many analysts blamed this year’s rise in bond yields for the February stock rout, which pulled major stock market indexes into correction territory. They also contributed to a sharp market downdraft late last week.
There are positive factors offsetting these negative factors. One is that the global economy is likely to grow even more briskly this year and next than was forecast as recently as November, according to the Organization for Economic Cooperation and Development. The others is that large U.S. corporations are expected to continue posting unusually strong earnings gains, helped by a weakening dollar (good for overseas sales) and the federal income tax overhaul. Analysts project first quarter earnings of S&P 500 firms will increase a stunning 17% from a year ago.
What is Your Game Plan
What should a retiree with liquid investments do?
The proper path is fundamentally easy — assuming you have the psychological fortitude to withstand the ups and downs of the market – because there is no reason to abandon a long-term investing strategy. Investors simply need to make sure their strategy still makes sense and review its performance. This can educate you about how your portfolio might fare in a steeper downturn, such as a bear market, and help you cope with volatility by providing a better picture of might lie ahead. This step, in fact, is crucial – virtually all successful long-term investors have learned how to psychologically stay the course and whether the trauma of steep market declines.
With this in mind, here are some specific tips:
- Remember that volatility is a normal part of investing, triggered by a wide assortment of events. Offsetting this unpleasantness is the fact that the stock market over time has always been the best financial investment. 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, such as early February. In other words, get a good 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 be your cup of tea 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.
- Think twice about replacing conventional stock funds with so-called low-volatility funds, which typically invest in bonds and commodities as well as stocks. There is a price to be paid in mitigating the occasional roller coaster: Long-term appreciation. These funds seldom can compete with all-stock funds when the market is rising.
- If market downturns unnerve you more than average and you cannot address this, consider buying balanced funds or multi-asset funds. The former invests 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.
- Bear in mind that your fortitude is likely to be tested sooner than later. The economy has been expanding nearly nine years, an unusually long time, and while the next recession is not on the horizon, it is inevitable. The vast majority of bear markets – declines of at least 20% — roughly coincide with recessions, according to Ned Davis Research, typically starting a few months earlier.
The good news is that if you do your homework, you’ll be in good shape to weather the storm when it comes. And, in any case, as an annuity owner with guaranteed lifetime income, 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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