Personal Finance

Beat Market Volatility With These Retirement Savings Hacks

There's no denying the fact that the stock market is unpredictable. If you are an equity investor, you may be well aware of the ups and downs associated with the market. Stocks hit a high, they witness a correction, they again reach an all-time high, and the cycle continues. That's volatility. Volatility works both ways, and while people love when prices go up, they may completely freak out and make mistakes when they see their stocks going into red territory. Even if you are well-versed on the subject of investing and stay updated about the latest market news , it will still be difficult for you to time the markets perfectly.

The markets have been pretty stable since the Great Recession. While we certainly don't have a crystal ball for the stock market, we have to wonder: what if history repeats itself? In fact, analysts are expecting 2019 to be a tumultuous year for the stock market amid myriad woes including a slowdown in the global economy and U.S.-China trade tensions.

When the market gyrates and volatility levels increase, it can make investors' stomachs churn. For those nearing retirement, it can get all the more overwhelming. So, are investors prepared to handle these rough rollercoaster rides of the market?

Get Perspective: Understand Your Financial Goals

Well, first, it's important to understand that market volatility is natural and we can't possibly control it. Hence, it is better to focus on things we can control and stop fretting about every rise and dip in the market. It's wise to maintain a cool head in a choppy market and refrain from making hasty emotionally-driven decisions.

Young investors especially, who are decades away from their retirement, should not pay much heed to the alarming headlines and stick to their investment objectives as the markets tend to stabilize in due course. Amp up your investments by opening retirement accounts like 401(k)s and IRAs along with mutual funds and ETFs. Even amid volatile markets, young investors who have time on their side can boost their savings for retirement by putting money in value stocks and holding them for the long-term.

However, for those nearing retirement, the investment objective shifts to stable income generation, ensuring that they don't run out of money. They tend to become more conservative and focus on allocating money toward assets, which are less risky and generate stable returns.

So should you consider tweaking your retirement saving strategy amid an erratic market? Well, yes, though it largely depends upon how far from retirement you are. Let's check out some ways that can protect your retirement savings amid volatile markets.

Reshuffle Your 401(k) Funds in a Rocky Market

Sharp corrections during a volatile market can test the patience of even the most experienced investors. When you are evaluating your 401(k) account amid wild swings in the market, one of the key factors that you should consider before modifying your portfolio is how much time left before retirement.

Well, it's a common understanding that one's age influences their investment objectives and risk tolerance levels. As a person's risk tolerance level reduces with age, downward trending and volatile markets can unsettle the near-retirees even more. Thus, it makes sense that they modify their investments and switch to low risk/no risk options like treasury bills, annuities, or bonds. Baby boomers should in fact invest in assets that provide a certain degree of safety as well as protect them from interest rate fluctuations. For instance, shorter duration bonds will help guard from interest rate risk.

Amid a turbulent stock market, investors who are very close to retirement have a particularly shorter runway to recover from and may actually be tempted to hold cash than bonds whose yields are susceptible to interest rates. So, should you turn everything in your 401(k) into cash? No, as that wouldn't be the wisest decision. Instead of pursuing an all-cash portfolio, it is better to keep money invested in CDs, treasuries, savings deposits and other related options, which are devoid of risk.

However, this strategy is only prudent for near-term retirees. Those who are far from retirement should not really worry about altering their allocation of funds and shifting to less riskier instruments.

Sweeten the Pot with Roth IRA Conversion

When the market takes a dip and your traditional IRA feels the aftershock, it's surely an opportune moment to go for a Roth IRA conversion strategy. Note that clients have to pay taxes on conversion in exchange for tax-free withdrawals later as opposed to traditional IRAs where your withdrawals are taxed. It certainly makes sense to go for the conversion when stock prices are low so that your tax bills on the conversion reduce.

Apart from getting the advantage of paying lower taxes today, a Roth IRA enables your funds to grow in a tax-free environment. This strategy is especially suited for those who are almost a decade away from retirement and are in a lower tax bracket. This will not only lower their tax outgo at the time of conversion but also provide them ample time to gain from the tax-free pool of returns in Roth IRA.

Exploit Volatility with Dollar Cost Averaging

The disciplined investment technique of dollar cost averaging helps an investor do well 'on average' by investing a fixed sum of money at regular intervals, irrespective of the market conditions and stock prices. With a predetermined schedule and amount to invest, you will end up purchasing a greater number of shares when the prices are low and fewer when the prices are high.

While this approach doesn't really ensure you handsome profits or a guarantee against loss, it helps lowering the average price per share of your investments. Moreover, it puts you in good stead on the slippery slope of market timing and making emotional-driven decisions. This style of investing can particularly help a novice investor who has started saving for retirement.

Rescue your Retirement with Dividend Investing

Are you hungry for steady income amid market turbulence? When markets are volatile, pick stocks that have a strong history of dividend growth and generally act as a hedge against economic or political uncertainty. As these stocks mostly belong to mature companies, they are less susceptible to large swings in the market while simultaneously offering downside protection with their consistent increase in payouts. Moreover, they are proven outperformers over the long term and a safe bet to boost your retirement savings. The strategy of investing in dividend stocks seems prudent for all age groups.

Find Comfort in Gold When Markets Tread Water

Amid surging volatility, one can also plow cash into defensive assets like gold to rev up their retirement savings. The move into gold particularly seems more appealing to people approaching retirement. Owing to its countercyclical relationship with the stock market, this precious metal can provide cushion against market volatility and act as a hedge against inflation.

In fact, gold prices give an idea about the economic condition of a country. Generally, if gold prices are high, it reflects that the economy is not in a very good state as investors usually buy this precious metal as protection. If gold prices decline, it depicts a healthy economic state of a country as investors might be interested in other lucrative investments like real estate, stocks, etc.

Bottom Line

The way one eventually ends up saving for retirement depends on their risk tolerance level, financial goals and the stage of their life cycle. While near-term retirees should rebalance their asset allocations, millennials can stick to their investment strategy for high returns. Nonetheless, they should also hedge their bets to a certain extent, which will help mitigate losses during beaten-down markets. However, one should particularly note that the key to surviving any kind of market madness is by staying calm and avoid taking knee-jerk reactions.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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