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How to navigate fear, volatility in the stock market

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November 25th, 2014

In October alone, the Dow Jones 30 Industrials moved up and down by more than 1,700 points, and the Dow was down 700 points in the first two weeks of that month, according to Leon LaBrecque, chief strategist of a Michigan wealth management firm (ljpr.com/site). LeBrecque says things like Ebola, ISIS, the European recession and U.S. interest rates are partly responsible for the fluctuations we’ve seen in the market that are causing sleepless nights for some investors. 

“World jitters, behavior, economic data, are all contributing factors to the volatility,” LaBrecque says. “When this happens, recognize that volatility provides the opportunity to rebalance and re-price and, more importantly, to let markets regroup.”

So, if you’re retired or getting ready to retire, what’s the best way to deal with financial fears caused by headline noise and the real volatility happening in the stock market?

Weighing all the factors

Joshua Duvall, an investment advisor in New York (capitalfinancialservicesllc.com), says fears about things like ISIS and interest rates are valid. But, he says, it’s also important to remember there are plenty of reasons to feel optimistic about your financial future—decreasing unemployment, increased corporate earnings, a strengthening dollar, and increased energy independence, to name a few. 

“There is always something to worry about, or be concerned about, yet historically, the market has continued to go up,” Duvall says. “Good investments increase in value over time, regardless of other outside factors.”

Duvall says one of the best things retirees can do in the face of stock market fluctuations is to control the things they can control. Evaluate spending habits, tighten your household budget, and purchase long-term care and Medigap insurance policies, all of which can help you maintain your retirement lifestyle during periods of low returns. 

Investment advisors always have varying views about how much risk you should have in your portfolio during retirement. Dallas portfolio manger Charles Sizemore (covestor.com/sizemore-capital) says you should sell at the “sleeping point.”

“You shouldn’t carry so much risk that you can’t sleep at night,” he says. “If you are worried about your stock positions, you should take some money off of the table.” 

Instead of chasing returns, Sizemore says retirees should structure their portfolios to meet their primary financial goal, which for most people is to supplement social security income in order to maintain their lifestyle. Usually that means making investments that produce income. 

“Ask yourself, ‘If we had a big market sell-off, would I still be able to support my retirement lifestyle?’” Sizemore says. “If the answer is yes, then you can stomach more market volatility than the next guy.”

Sizemore does offer some specific tips for retirees. He says now is not the time to aggressively buy bonds, which are typically thought of as a key component of retirement portfolios. 

“If you believe rates will be drifting up, you are essentially locking in bad returns today and guaranteeing you won’t be able to take capital losses,” he says. 

You can also mitigate volatility in the U.S. stock market by taking a global approach to investing, Sizemore says. He says to create a balanced portfolio of dividend-paying stocks in the U.S., Asia, and Europe.

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