4 Strategies To Reduce Volatility In Your Retirement Portfolio
I have been asked recently how the current volatility of the stock market will affect the interest in annuities.
Of course, the obvious answer to avoid instability is to get out of the market, and most people are fearful of that. While the issue of volatility is clear, greed and the desire to make more and more sometimes can be overwhelming. I mean, “After all, doesn’t the market always come back?”
The answer is it does, and it doesn’t. What happens if the market is in decline when you have to make serious decisions about retirement, how would volatility affect you then? What if 2008 were to happen again? What if only a small portion of 2008 happened, how would you react? For most of us, we don’t have to imagine it because we lived through it.
For those who are truly interested in reducing volatility with their important funds, here are four ideas. A properly diversified portfolio (including bank products) can better withstand the volatility of the stock market.
1. Don’t invest in the stock market. Obviously, the very best way to avoid any losses in the market is to be free and clear of it. If you have no investment in the market, volatility is not an issue. The downside is the possible loss of purchasing power in the event we face another inflationary time.
2. Run to the banks: Nothing says safety like FDIC Insurance. Of course, the price you pay for security is a low return on your investments. Keeping money in banks might seem old-fashioned, but it still works. Plus, shopping around can often provide a higher interest rate than you have expected. There is nothing wrong with letting a bank hold your money and earning interest.
3. Money Market Accounts: For shorter-term solutions, consider using a money market account. The yield is small, but you retain full access to your funds. This keeps your money ready and available should an opportunity arise.
4. Fixed Interest Rate Annuities. (Multi-Year-Guaranteed-Annuity) Think of it this way; someone is going to hold your money. If an insurance company gets to do so, you can buy an annuity with a pre-set interest rate that allows you also to control when the tax liability is. Annuities are authorized to provide tax deferral, and this means that at some future date you can decide when to access your funds. Fixed-rate annuities can also be short-term, some as short as 4-5years. In general, annuities may offer a higher rate of interest than bank products, and for that, you must let them hold your money longer, something to consider.
If you’re afraid of stock market volatility, consider one of these approaches. There certainly is nothing wrong with running to safety; we all do it eventually.