Many Wall Street analysts are predicting a volatile market in the second half of 2023. That's because the Federal Reserve is likely to continue raising interest rates, the war in Ukraine is ongoing, and China's economy is slowing. Some analysts are even predicting a recession in the next 6 months.
If these predictions come to pass, that leaves retirees' portfolios in a precarious situation. Yes, “staying the course” is a tried and true strategy, as the average annual rate of return for the stock market over the past 100 years is about 10%. However, it is important to note that this is just an average, and there have been years where the market has returned much more or much less. For example, the stock market returned over 20% in 1995, but it also returned negative 39% in 2008.
If you're bearish about the market's near-term future, there are other ways of protecting your nest egg. Today, we'll cover a few that retirees can consider.
Spread it out
If you're a retiree who has met with a financial advisor even once in your life, then you're already likely aware that diversification is perhaps one of the best strategies to protecting your savings in a volatile market. Spreading out your money over a variety of investments can reduce the impact the market has on your portfolio. Yet according to a report by Schwab for their Modern Wealth Survey for 2019, only about 14% of Americans surveyed said they would consider having a diversified portfolio. Only 28% felt “very confident” in even reaching their financial goals.
Investors can start small and work outwards. Consider your asset classes and see if there is a strong mix of stocks, bonds, cash equivalents, and alternative assets such as real estate or commodities. These different assets fluctuate at different times during market volatility. Therefore, by spreading out your investments you can reduce the risk associated with investing in just one or two asset classes. From there, think global. While it might feel patriotic to focus on the United States, that doesn't help retirees protect their future income. So consider geopolitical and economic issues that might impact both home and abroad, and discuss with your advisor where more global investment is need for future growth opportunities. Keep up to date and rebalance periodically, ensuring that your investments continue to align with your long-term goals.
Get defensive
If you're a retiree really looking to get away from the swings in the market, then consider investing in defensive assets. These investments tend to be more resilient, providing more stability in volatile times. That being said, it's important to note that defensive investments typically post lower returns in bull markets, compared to growth stocks. So finding a nice balance to reach a healthy risk versus reward is paramount.
Some options to consider right now would be government bonds or highly rated corporate bonds. The U.S.'s 10-year bond yield is at 4% and Charles Schwab (SCHW) is predicting good performance for corporate bonds for the remainder of 2023. If you want stable income streams, especially during volatile periods, then bonds are certainly the way to go. Advisors typically recommend a large part of retirees' portfolios be dedicated towards these high-quality, fixed income bonds.
But bonds aren't the only option. Dividend stocks can also be a great way to provide a defensive aspect to your portfolio. Companies that pay dividends typically offer more stability in market downturns, offsetting losses in returns. But be careful and be sure to invest in high-quality, blue-chip companies with a long history of dividend payments and growth, as well as a strong future outlook. Finally, there are not just defensive stocks but defensive sectors, such as healthcare and utilities, that usually perform well even during recessions. These stocks provide essential services we'll need regardless of how the market performs, so adding a few of these to your portfolio can also provide protection.
Use Options to Hedge Against Volatility and Protect Against Downside Risk:
Options are a type of derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. Options can be used to hedge against volatility and protect against downside risk.
One way to use options to hedge risk is to buy a put option. A put option gives the buyer the right to sell an underlying asset at a specified price on or before a specified date. If the price of the underlying asset falls below the strike price of the put option, the buyer can exercise the option and sell the asset at the strike price, which will limit the buyer's losses.
Options can also be used to hedge against volatility. For example, if an investor is worried about the stock market becoming more volatile, they could buy a straddle. A straddle is a combination of a call option and a put option with the same strike price and expiration date. This will create a position that will profit if the stock market becomes more volatile.
Don't risk your returns
There are certainly ways to protect your retirement savings from dropping during a volatile market. Staying the course is certainly one strategy, but if you're looking for more options these certainly could provide protection and stable growth in the near-term market turbulence. However, always remember to stay calm, focused and informed. And if you have a financial advisor, don't be afraid to reach our to him/her.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
