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Market volatility is actually a good thing for retirement investors

November 3rd, 2015

Stock market volatility is just about the last thing any retirement investor wants to hear. But the reality of volatility is that it is actually a good thing for baby boomers and their long-term investments.

Volatility is an advantage
Retirement investors are the only people who should be resting comfortably at night these days. There is one primary reason for this: despite the ups and downs of the recent markets, long-term investments are still performing well. So while many investors buy and sell during market volatility, long-term, retirement-focused investors are sitting pretty.

This actually applies for both equities and bonds markets because their long-term returns have been good. For instance, according to a report in the Motley Fool, long-term government bonds have returned an average of 5.1 percent annually since 1926, while stocks have generated 9.9 percent annually on average. Let’s just say an¬†investor built a $100,000 all-bond portfolio in 1926 – that investor would have $458,730 today. On the other hand, with the same amount invested in an all-stock portfolio, that investor would have $1,879,971 now.

These numbers would most likely increase for active investors who bought during market slides and routinely re-balanced their portfolios. The true benefit of volatility for a retirement investor is that they are afforded the opportunity to continuously adjust their risk exposure to ensure that they have a higher floor, while maintaining a high ceiling for growth potential. This is where the purchase of fixed-income instruments during bullish markets can help these investors lock-in favorable returns and, more importantly, avoid staggering drops.

Rebalance, rebalance, rebalance
This cannot be understated: rebalancing is the key. For retirement investors, there is no time to lose. So selling off the losers and using that capital to take a chance on other alternatives is the smart play. That is rebalancing, not market watching.

This may sound counterintuitive to the long-term patience listed earlier, but pruning a portfolio is as important as building one. Typically, this should be done at least once per year, although it is recommended to take a look at a portfolio on a quarterly basis. According to a Main Street interview with Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF, rebalancing is an effective way to use capital and adjust a portfolio to ensure that investors keep more of their earnings.

“In traditional portfolio construction, volatility is assumed to be static, and today’s volatility is viewed as tomorrow’s volatility,” Tuttle explained. “Targeting portfolio volatility is a much better approach.”

While this may be a common-sense approach to using volatility, there is a difference between watching the markets and understanding how to use volatility to an advantage. This is particularly true with determining the types of stocks and bonds to target. However, whatever investors look for in building their portfolios, they need to ensure that they have all the information they need. That is where market platforms like eSignal 12 series trading software can help investors make informed decisions.