It’s not just your imagination, the stock market has been more volatile this year.
The Dow Jones Industrial Average is still down by more than 2,000 points from its record high in late January. The VIX Index, commonly referred to as Wall Street’s fear gauge, has stayed above 10 for most of 2018 after trading below that level for much of 2017.
If you’re retired or nearing retirement, you might be wondering if it’s time to pull money out of the market to minimize risk.
Financial planners agree though that selling your holdings out of fear is one of the worst things an investor can do for their financial future. Here’s why.
Stocks Tend to Make Gains When Bonds Drop
Conventional wisdom states that investors should reallocate their portfolios in favor of more stable investments such as bonds and a money market account as they age. But exiting the stock market completely can actually increase your risk, according to certified financial planner John Ulin, founder and Managing Principal of Ulin & Co. Wealth Management.
“Volatility has returned with a vengeance,” Ulin says. “To make matters worse, retirees that are depending on stability and income from bonds have seen the ‘safe’ side of their portfolio also fall into the red this year due to rising rates.”
Owning both stocks and bonds will ensure that at least part of your portfolio is growing at all times, helping to make up losses in other areas. Retirees should consider the increased volatility this year an “emergency drill” to make sure their portfolio allocations are wise, Ulin says.
Stocks Beat Inflation, Unlike Bonds
One of the greatest advantages of stocks for those with 30 years of retirement ahead of them is that the value of stocks tends to grow with the rate of inflation.
“Especially with people living longer, they are going to want to have assets with the potential for growth and that can keep up with the price of gas, healthcare and food,” certified financial planner Darin Shebesta of Jackson/Roskelley Wealth Advisors, Inc. explains. “It’s important to have equity exposure because stocks are one of few assets that keep up with inflation.”
Or in the case of aerospace giant Boeing’s (BA) stock, trounce inflation (up 90% in the past year).
Dividends Can Provide Extra Income
High-quality dividend stocks such as Apple (AAPL) are a better option than selling their investments altogether for retirees looking to put a little extra cash in their pockets, according to CEO of PNC Investments Rich Guerrini.
“There are a lot of household name stocks that pay fine dividends,” Guerrini says. “But they might not provide growth for retirees who are thinking about the accumulation of assets.”
But, retirees shouldn’t rely on dividends as their sole source of income according to Guerrini because they are not guaranteed. Because companies can reduce or end their dividends, retirees should pair dividend stocks with growth stocks such as Amazon (AMZN) and an emergency fund that contains two to three years of living expenses.
High Returns Can Help Secure Your Children’s Future
Stocks are one of the best ways to grow your money over time, certified financial planner Charles Weeks of Barrister Wealth Management says, making them a great option for retirees looking to build up an estate to leave to their children.
“If you invested into the teeth of the bear October 2007 and held until last November you would have earned around 7.7% annualized in the S&P 500 ,” Weeks points out. “So if the market were to drop now would it be bad as that time? If you held for 10 years from today will you be higher or lower than 7.7%? I have no idea but I wouldn’t bet against it.”