Market Volatility: Fluctuations in the Equity Markets

Fluctuations in the equity markets can give many people a reason to question the validity of investing in stocks. The short term pain of seeing their investment portfolio drop brings back memories of another market meltdown, similar to what many people may have experienced in the past.

All investors ponder the ramifications of a steep market decline. They examine the investment advice they are receiving most often during market downdrafts. However, those who have read Securing a Retirement Income for Life know and understand the ebb and flow of the markets. This is why this book is so valuable. People who have read the book are more aware of market volatility and all of the other things that are likely to happen. They are undoubtedly better positioned for the future.

We have all heard about the increasing number of baby boomers who will be retiring. There are many things going on right now that will have significant ramifications on the financial security of future retirees. There is uncertainty over Social Security benefits. Fewer people have a defined benefit pension plan. More and more people have a 401k or similar defined contribution plan. People are living longer. There are decisions about what to do with 401k plans after retirement, how to manage the systematic withdrawal rates and other potential risks.

However, there is something exciting about this future wave of new retirees. It is exciting to know that there are ways to handle the various uncertainties. There are strategies that informed investors can use to manage, protect and preserve their wealth.

As you know, the initial focus in retirement planning is on accumulation – building wealth. The second aspect is distribution. You have to take a different approach in the distribution phase. Basically, you have to consider how the ramifications of fluctuations in the equity markets differ during retirement – or during the distribution phase. There is a tremendous difference between the effects of market volatility on the distribution side versus the accumulation side. A loss due to downward fluctuations is always permanent during the distribution phase. This is one of the reasons why you should not rely on retirement calculators on the web to make financial decisions, especially during the distribution phase. They fail to account for fluctuations in portfolio growth rates or the sequence of returns.

Fortunately, there are strategies you can use to secure a retirement income for the rest of your life. You will have to consider your time horizon, the portfolio growth rate, the value of your retirement investments at retirement and your planned systematic withdrawals. Risk tolerance is another factor. Perhaps during retirement, you will become more conservative. Most importantly, you will have to account for the fact that if your portfolio grows less than what you have originally projected during the first few years after retirement, it may never recover to the point where it will last for as long as you live.

As described in the book, you should consider the use of combinations, where you position two or more different strategies, to eliminate or substantially reduce the risk of loss due to fluctuation in the equity markets. Once you understand these techniques, you will be more comfortable with the normal ebb and flow of the markets. You will not panic during the next decline in the market.