Retirees: Don't Make the Same Mistakes Before a Market Correction

In the last year, many retirees were in panic after the government shutdown. Even worse, economists have been warning the country could sink into a full-on recession. The economy is cyclic, history has proven that is true. With the recent swings in the S&P 500, Dow Jones and Nasdaq, it's more than enough to cause anxiety and unwanted stress to retirees who rely on their portfolios to sustain their retirement once they stop working.

How can someone who's approaching retirement, or is already retired, better handle the next financial crisis? Although many might say the economy is going through a healthy pullback, there is no doubt that another financial crisis will come at some point. Be sure to avoid making the same mistakes so many retirees did in 2008- or possibly “again.”

Don't Make The Same Mistakes!

Be careful who’s advice you listen to

Here’s a perfect example: right now (I don’t want to mention names) but there’s a famous and well-known American investment analyst who owns his own firm and taking a lot of heat for some recent very stupid comments he made in a public speech. Now this “guy” is very wealthy and does a ton of marketing to be aware of annuities! My “beef” is that there’s no one product that fits everyone’s situation and when you give advice to people about staying away from a certain product – even when it may be the best option in that person’s situation, that’s bad advice, borderline criminal to me. Now let’s think about this, his firm sells stocks, bonds, mutual funds, etc... how does he get paid? He gets paid just like an annuity from his portfolio management! Kinda hypocritical, don’t you think? Also, on their website they offer annuities as well. So, beware of who you listen to an invest your hard earned money with.

Don't try to time the market – you’ll lose

You'll hear advice from all sorts of financial "gurus" to buy when the market is in turmoil, but that doesn't mean you should try to pick the spot where the market is at its lowest. Most investors, including retirees are really bad at timing the market. Even portfolio managers don't always make great decisions.

Not only did many investors sell off more than they should several years ago when stocks were on the skids, but most retirees waited too long to get back in when the worst was over and they missed the gains the bull market eventually delivered. If retirees had just stayed put, they would've continued to earn money in dividends and locked in some healthy capital appreciation.

Trying to correct your risk exposure during a decline can be disastrous, because you're essentially trying to time the market, and that is gambling with investments – who can afford to take that risk? When the stock market is crashing and crowds of people are rushing to sell, that's when real buying opportunities show up.

Don't lock yourself into long-term bonds

If you haven't already, sooner or later you'll hear about the inverted yield curve. This happens when interest rates on short-term bonds are higher than those on long-term bonds. At this point, it would be tragic to lock up your retirement accounts into a 30-year bond when interest rates will eventually rise in the future.

And the worst part is when portfolio managers purchase bond funds that may be structured to have more long-term bonds versus short-term bonds.

Don't try to load up on stocks

As retirees have noticed that their portfolios are well short of what is needed to sustain income during retirement, many might have dramatically increased their level of risk by filling their portfolios with stocks and stock-based mutual funds - this is a huge mistake.

Recently, I met with a retired couple who had over 68% of their portfolio in stocks. The worst part was they had a conservative risk profile, and a correction would be devastating for them…makes me wonder what advisor would do that to a client? Most likely, there are many other people taking on too much risk who could be in trouble when the bull market gains end.

It's pertinent to keep your allocations appropriate, even if you're behind on savings. Taking on immense risk isn't always going to produce an equal-sized reward. You need to recognize that when you take on too much risk, you'll no longer have any working years to recover from significant losses either prior to or in retirement.

Don't stash your cash

You're probably thinking that retirees have seen enough to be emotionally stable about weathering a crisis, right? But that's far from true. Markets tend to go down more than they should because panic sets in. Anybody actively investing in 2008 probably remembers hearing about all the retirees who sold out in fear -- locking in losses -- as they watched their resources shrink and some lost 40% of their nest-egg. Truly tragic.

Holding onto too much cash while anxiously awaiting the next market crash is another mistake a lot of retirees often make. The problem is the older you get, the more you're likely to rely on dividends and interest to grow your balance. Cash provides neither of those benefits and needs to be used to create any sort of growth.

The worst part is by having too much cash, you're losing buying power every year, because inflation erodes the value of your dollar.

What to do instead: Diversify with the right annuity

Diversification doesn't mean to just diversify into stocks, bonds, ETF’s and mutual funds. Depending on your level of income needs, there are other investment products to protect the principal in your retirement portfolio - like annuities.

An annuity might be a way for retirees to diversify, satisfy a potential income need, and invest in a conservative fashion without having to sacrifice their entire retirement or investment accounts.

Annuities should be viewed as an alternative to bonds and a replacement solution to other safe investments -- such as CDs, money markets, savings accounts and even T-bills. Finding the right annuity is often time-consuming or difficult, but don’t worry, we can help you pick the right choice for your situation.

When researching annuities, the poorest mistake you can ever make is purchasing a variable annuity. The main objective of using a (FIA) fixed annuity is to transfer any sort of risk onto the insurance company. By having a variable annuity, you're shifting it right back to you and possibly stuck with keeping it for a long time, even after the surrender period has passed. Most people don’t know that.

Be sure to work with a financial adviser who is not biased to a certain few insurance carriers or is captive -- a term used for advisers that can only sell a "one-size-fits-all" solution.

Markets have crashed and recovered, but you'll never time it right. If history is a guide, the next time financial markets fall, they will eventually recover. Don't panic. Make appropriate changes if necessary and allocate what you can't lose to principal-protected investments just in case the downturn is longer than you expected.

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