For skiing enthusiasts, the concept of ups-and-downs is quite exhilarating. Just the thought of cutting powder on tall, sloping moguls can make even the “hard cores” blush.
But as recent market volatility reminds us, the goodwill doesn’t apply to ups-and-downs in every situation. Sometimes it can bring just the opposite.
Earlier this month on Morningstar, Director of Personal Finance Christine Benz observed how equity market down-spurts can disrupt a retirement portfolio.
Portfolio losses might not matter as much as when people are younger, as they have time to recover – and to grow past the point when portfolio asset values dipped. In fact, Benz writes, for those with many years to retirement (or under age 50), "not taking full advantage of the historical outperformance of riskier asset classes is a bigger risk than being too conservative."
But as retirement draws near, some flight to safety may well be a prudent course of action. Benz explains: "At that life stage, you're much more vulnerable to what retirement planners call sequence of return risk. That means that if you encounter a calamitous equity market early on in retirement and need to spend from the declining equity portfolio, that much less of your investments will be left to recover when stocks finally do."
And what if a portfolio has gone into reverse mode? "Your only choice to mitigate sequence of return risk--assuming your stock portfolio is in the dumps and you don't have enough safe investments to spend from--will be to dramatically ratchet down your spending," Benz says. "Needless to say, that's not something most young retirees are in the mood to do."
