Over the past few months, we’ve seen a large increase in the volatility of the stock markets.

In a basic sense, volatility for an investment refers to the expected range of values it might be worth over a given period of time.^[1] A large range of possible values represents high volatility, and a small set of values is considered low volatility.

For example, suppose you invest in stock for a company which has signed a contract to do a large amount of very profitable business in China. You make your investment expecting the value of the stock to be fairly high for the length of the contract. That would be low volatility, if there is fairly little change in the value.

But then suppose the U.S. and China get into some sort of trade dispute, hypothetically.^[2] Suddenly, there are doubts about whether or not that contract will still be as profitable because of tariffs on one or both sides. If everything goes well, the investment will still be worth the expected large amount. But if things don’t go so well, the stock might drop significantly in value. Suddenly, there are a very wide range of possible values for your investment because no one knows how it will turn out – that’s high volatility.

How can this affect your retirement? That depends on the stage you’re at in your financial life.

If you are still in your “accumulation” years – up to your mid-50s or so, you’re likely looking for growth in your investments. You’re still trying to build up your nest egg for retirement, and you can afford to take more risks in exchange for a chance of higher returns. In times of increased volatility, you may be tempted to ditch all your stock investments (higher volatility) and move your money into something safer like bonds (lower volatility, usually). Is that always a good idea?

No, not always. If the past is any guide, we expect that eventually things will straighten back out and the stock markets will turn back around. If you wait until that happens before you move your money back into stocks, you won’t get the advantage of purchasing stocks while they are selling for lower prices.

If we could see the future perfectly, and know the dates when stocks would rise and when they would fall, we could time our exit and entry from the markets and maximize our returns. But no one knows when those changes will take place, exactly, and trying to time the market that specifically^[3] is frequently a good way to end up losing a lot of your retirement savings. If you are in this younger age group, you’re often better off simply waiting out the period of high volatility, meanwhile investing consistently,^[4] so that whenever the markets stabilize, you’ll already be in a position to reap the benefits.

What if you’re almost retired, or very recently retired?

That places you into the most at-risk group, if you haven’t properly adjusted for the “preservation” phase of your financial life. From the time you are 6-10 years away from your expected retirement date, you should be shifting your retirement savings away from higher risk/higher return investments (like many stocks) into lower risk/lower return investments (like many bonds). You no longer have enough remaining years in your working career to wait out longer periods of high market volatility or downward turns like crashes or depressions. Generally, a good financial plan should account for this in the later years of your working career by moving your savings toward lower risk investments.

But although we can reduce the threat of volatility by making certain typical changes (like moving from mostly stocks to mostly bonds), we cannot entirely eliminate its impact. For example, suppose you have placed a large amount of your retirement savings into some bonds, but then the city or utility offering the bonds undergoes sudden catastrophic change.^[5] Depending upon how things are structured, you might find that the investment you thought would have low volatility ends up with much higher volatility and you lose some of the value of your savings as a result. That’s one good reason to have your retirement money spread out across multiple investments offered by multiple sources in multiple fields (mutual funds,^[6] for example) – it reduces your risk.

A competent financial planner should be able to help you to create a retirement plan which works for you at every stage of life. James Holloway, Sr. and the rest of the team at Texas Financial and Retirement work with families and individuals every day with that goal in mind. Call 903-534-5477 or email bestclients@texasfinancialandretirement.com today to ask about a free initial visit. If it looks like we’re a good fit for one another, we will help you identify what’s important to you in your retirement years, analyze what savings you’ve accumulated for those years, then assist you with crafting a custom plan to help you in achieving your retirement goals.

We can’t eliminate all the risk from volatility in the markets, but we’d love to help you to get retirement right!