The Importance of Diversification: Weathering a Market Downturn When Retired or Nearing Retirement

Two of the most common challenges in a market downturn include a loss of investment funds and savings, as well as diminished liquidity. Being able to weather a market downturn will depend on a lot of things but one of the most important of these is having the right mix of investment options. We are going to look at this and other ways of mitigating the risks associated with a market downtown.

Financial Challenges When Retired or Nearing Retirement

When you retire, you typically have around 30 years’ worth of expenses to think about. This means that any proposal to help you get through this period will need to take into account short-term liquidity as well as long-term growth that can sustain living and other expenses.

The key lies in the diversification of your investments and a proper strategy. For many retirees, most of their expenses will come during the first few years of their retirement. This means they need to be highly liquid, which means they have to have short-term investments that provide this sort of liquidity.

After that, they need to think about dividend-paying bonds and stocks. This is mainly during the years a retiree needs to keep their lifestyle and have a predictable income to help pay for their living expenses. After that, they need a growth-oriented investment option. This is so that they have something to fall back on.

Once all these investment options are planned out, all that remains is thinking about the amount of risk one can tolerate. In many cases, a market downtown can be a valuable learning experience for how much risk a retiree is willing to make, as well as which investment options can hold up when the market is rattled. Once these lessons are learned, the retiree can talk to their investment or financial advisor to better tailor their investment options, so they can get the most out of them.

Ensuring You Are Properly Diversified

As has been mentioned earlier, diversification is the key to weathering most market downturns. When the markets are doing well, most investors do not think about altering their investment portfolios to ensure they are performing their best. They let everything sit instead of trying to alter their mix of cash, bonds, stocks, and other investment options for the best returns. By not doing this kind of rebalancing, investors might find themselves holding stock that no longer has any value.

For investors who are looking for a mix of investment options and who have a healthy appetite for risk, there are various investment options that can help them keep a healthy balance of investment options. Stocks, real estate, and bonds remain some of the best investment options whether you are retired or not.

Stocks, Real Estate and Bonds

Stocks are pieces of a public company that any investor can buy. Stocks are very volatile with this risk mitigated by the fact that they can make you a lot of money. Seeing that they have massive upsides and downsides, what is the best way to invest in stocks? Even within stock investments, you need some diversification. This means you need to select performant stocks from different industries, economic sectors, and even countries if you need to. Doing so gives you all the upside while covering any downsides that may exist in your particular portfolio.

Many people are rightly wary of investing in real estate since the 2008 downturn, but the market has largely stabilized and real estate is again one of the best investment options in the market. When investing in real estate, you have a choice between purchasing a house or apartment for your own use or to rent out for a predictable monthly income.

The reason why real estate is such a great investment option is that there are so many ways of investing in real estate. If you do not want to handle everything that comes with managing your own property, you can choose to invest in real estate investment funds or real estate investment groups.

A real estate investment trust uses investors’ money to purchase, operate, and sell properties that bring in money. These trusts are bought and sold on major exchanges. Real estate investment groups, on the other hand, let investors buy property through a company, with the company left to operate and manage the property.

Bonds are a very stable form of investment and they act like loan agreements between two parties. An investor gives a third-party entity money in exchange for a bond. The borrower has to pay the money back within a specified period and with interest on top of the amount borrowed. The bond issuer, the borrower, sets the terms of the bond, which leads to different bonds having different interest rates, payment periods, and more.

While there are more investment options you can explore, they are a lot riskier and speculative than the ones discussed above. Wealthsimple has a detailed guide on the best investment options that you can look into. In addition, Wealthsimple has financial tools to help you invest in these and more options, with real humans standing by to answer all your questions and guide you to get the most out of your investments.

Pay Debts While You Are Still on Top

Debts and other obligations will eat into your savings and this can be a lot worse if there is a market downturn when you are nearing retirement. Reducing your debts ensures you lower your withdrawal threshold which helps your money last longer.

If you are already retired, you can use money from your pension plan to pay off your debts and other obligations which leaves you with enough money from your earlier investments to use on personal expenses.

Buy Commodities

Historical data shows that when there is a market downturn, the price of commodities increase. This is because there is an increase in the demand for commodities due to market uncertainty. Commodities that you can sell off easily during a market downturn can be great for increasing your cash flow if the downturn happens when you are retired or are nearing retirement. The good thing about commodities is that they can be part of your short, medium, or long-term investment goals, as there are always in demand, more so when the market is on a downward trajectory.

Keep an Eye on the Markets

How well you weather a market downtown will also depend on how well you are informed about the market. The more informed you are, the easier it will be for you to see a downturn coming. This will give you ample time to prepare and align your investment portfolio the right way.

Do not make the mistake of thinking the market will always rise and that your investments will always be safe. Keep in touch with a financial advisor who can help you make the transition if there is a downturn on the horizon. In addition, keep yourself informed so you can make the best decisions as to when to exit certain investments and increase your holding in others.

Convert Your Registered Retirement Savings Plan

If you do not want to sell stock or your investments due to a loss in cash flow occasioned by a market downturn, you can convert your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF). The RRIF gives you a fixed monthly income so you have the additional cash flow to keep things together while the market realigns and gets back to equilibrium.

Remember that the income you get from the RRIF is taxable, so take that into account before you do the conversion and start withdrawing from it.

Recoup Your Losses Using Future Gains

If you think it is likely you will lose a lot of money due to a market downturn, there are things you can do to ensure you do not lose it all or make up the money you lose in the future. One way of minimizing your losses is by selling risky investments, investments that are likely to be wiped out due to a market downturn. Although you might want to hold out to wait for prices to stabilize, that may not be possible because of your diminished cash flow. In addition, it might take too long for the investments to start bringing in any money.

Investments swing up and down and if the markets are down right now, you can be assured that they will rise again in the future and you can recoup your losses. If you decide to do this, do not forget to talk to a financial advisor so they can help you pick out the gems that will be incredibly valuable in the future.

Planning for retirement is a complicated process that can be complicated even further if there is a market downturn when you are nearing retirement or when you have already retired. Although every retiree will have their own way of dealing with a market downtown, following the strategies above is a good place to start. As always, do talk to your investment or financial advisor to see what options would work best for your particular situation.