I’m always amazed at the number of new clients who come in not knowing how much of their portfolio is at risk.
Time and again, we’ll find that people never made the switch from the accumulation phase of their investment cycle to the preservation phase that is so important in retirement. They’re taking a lot more risk than they realize — and much more than they actually want.
So, one of the first things we’ll do is perform a risk assessment on their current holdings. They’ll tell us, “I don’t want to lose more than 5% to 10%,” but when we get the analysis back, we’ll see they’re at risk of losing 20%, 30% or even 40%.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Once they get over the shock, they’re ready to learn about volatility and what it can do to their portfolios — specifically in retirement, when they’re depending on those investments for income. That’s when market risks represent the potential loss of funds, which can have an impact on the retirement lifestyle they dreamed of for years.
Volatility isn’t as much a concern during those accumulation years. If you’re 35 and the market takes a tumble, you’ve got plenty of time — decades, in fact — to recover before you’re ready to retire. But when you’re actually in retirement, volatility definitely becomes a significant concern.
A major reason for that concern, of course, is you no longer have all those years of potential recovery time ahead of you to counteract anything that goes amiss. If the market takes a big dip, you have less chance of recovering, and that may mean you’ll need to change your spending habits and how much you’re withdrawing from your accounts to live on.
Some people might argue that volatility also involves some big gains in the market to counter those big losses. Won’t it all even out in the end?
Not necessarily.
If you have $100,000 invested and take a 30% loss one year, a 30% gain the next year won’t even get you back to square one. That 30% loss dropped you to $70,000. That 30% gain brought you to $91,000, still $9,000 below where you started.
Another factor comes into play when you’re already retired. At that point, you also may be withdrawing money from some of your accounts to handle your daily living expenses and enjoy your retirement. A big drop in a volatile market — combined with your withdrawals — makes it even more difficult to keep things steady on your financial side.
It may be time to take a real hard look at the amount of risk you have in your portfolio by having a professional do a risk analysis for you and determine whether you’re taking too much risk, being too conservative or playing it just about right.
The result could be eye opening — and it also could provide much-needed information that will help you make better investment choices going forward.
Andrew Montgomery Costa is the co-founder and managing director of Global Wealth Management (www.askglobalwealth.com). He is a co-author of The Ultimate Success Guide and the co-host on radio’s The Global Wealth Show.
Ronnie Blair contributed to this article.
-
The Economic Impact of the US-China Trade WarThe Letter The US-China trade war will impact US consumers and business. The decoupling process could be messy.
-
Retire in Malta for Quiet Coastal PerfectionSeemingly remote yet easily accessible to other points in Europe, sunny Malta offers paths to citizenship and residency for families and retirees.
-
Will My Children Inherit Too Much?If you worry about how your children will handle an inheritance, you're not alone. Luckily, you have options — from lifetime gifting to trusts — that can help.
-
Charitable Giving Lessons From Netflix's 'Apple Cider Vinegar'Charity fraud is rife, and a Netflix series provides a timely warning about donating money to a good cause without looking into its background.
-
Four Takeaways From Filing Your Taxes to Boost Your Financial FutureNow that another tax season is in the rearview mirror for most of us, what lessons can you take from what you learned about your finances to plan for the future?
-
What Claims Adjusters Are Thinking vs What They're SayingAfter a natural disaster, few of us are at our best, but here's what to keep in mind when you're interacting with your insurance company's claims adjuster.
-
Looking to Make a Job Change? How to Stand Out Like a ProTo make a strong first impression in interviews or when networking, skip your job title and work history and use an opening gambit that highlights your talents.
-
First 100 Days: Trump's Impact on Your FinancesHere are some opportunities to consider regarding investing, interest rates and tax cuts as the financial landscape shifts under the new administration.
-
What Would Happen if You Put Your Tax Refund in an IRA?Not only could you get a tax break, but the compounding effect over 35 years could turn the average refund into nearly $14,000.
-
Children Can't Afford to Fly the Nest? Here's How to HelpThe high cost of living means more adult children are staying at home. Here are four ways to help financially so they can eventually spread their wings.
