Wendy Bennett

As I sit here over Memorial Day weekend on the shores of Lake Ontario watching the boats leave and enter the marina, these words of motivational writer William Arthur Ward come to mind, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

Winds of change define a force that has the power to change things, and we all know change is constant. Changes in the stock market began in the latter half of 2021 and has continued during this current year. This is the result of markets wrestling with widening inflation and rising interest rates — something that hasn’t happened in years and has often led to “investor complacency.”

What we’re witnessing in the markets is a readjustment. It’s not unusual, but it is uncomfortable. When this happens, markets re-trench, valuations create a lower base and markets can eventually go up from there. This market dynamic should be navigated in productive ways that can differ depending on where you are in your investment life cycle.

For young investors with time to recover, a market contraction is just another storm to be weathered. Buying at current discounted prices can often work in their favor over the long run.

However, if you are already in retirement, or are about to enter into it, what you do now could translate into a reduction in lifestyle for years to come.

Regardless of where you are in your investment life cycle, here’s a universal piece of advice: DON’T PANIC! That often leads to panic-selling, and such fear-based decisions cause an investor to sell at a loss, and miss the recovery when things turn around.

To carry you through times such as these, you should always have an emergency fund in place. This should equal three to six months’ worth of expenses during your working years in case of job loss or disability, and 12 months’ worth of expenses for retirees to provide security during times of market volatility.

In addition, everyone should practice diversification. It allows you to spread out risk for investments that perform poorly and to capture the upside of investments that do well.

Also, the favorable vs unfavorable asset classes tend to change over time so exposure to a diversified mix will prevent you from chasing after returns. One timely action you should consider at any age is doing a Roth conversion. Market declines are an ideal time to convert a greater number of shares from a traditional IRA to a Roth IRA. Even though it means you may pay some taxes now, its fewer taxes than you’ll pay down the road when your investments are up.

Here are some actions that apply more so to retirees or those who are nearing retirement.

First, use the “bucket approach” for your investments. This means having a mix of investments intended for short, intermediate and long-term goals.

Your short-term bucket should be invested more conservatively, while the long-term bucket can take a more aggressive stance to investing.

Second, it helps in retirement to know which income source will pay for which expenses and to distinguish between “wants” (travel, entertainment, timing of certain major purchases, etc.) vs “needs” (food, housing, taxes, insurance, etc.). Try to identify guaranteed income sources to fund your “needs” — sources like Social Security, pensions or annuity income. Then see how much of your “wants” you can link to investment income and withdrawals.

This can take a lot of pressure off your investments by adjusting your wants based on market conditions. For example, you may want to pause that major purchase you had been planning or delay that vacation.

Lastly, if you’re physically able and your portfolio would be better served, you may want to do some part-time work to decrease your dependence on your investment portfolio. This is also a good way to keep the mind and body sharp during your retirement years.

Investors should avoid being a pessimist or an optimist. Being a realist keeps you grounded and focused on what needs to happen to work within any given market conditions.

Markets tend to correct, sell off, re-price and eventually recover as a natural cycle. It should give peace of mind to know that, historically speaking, markets have spent a lot less time in negative territory than in positive territory.

Adjust your sails accordingly.

Wendy Bennett is a senior financial adviser at Bennett Associates Wealth Management in Butler.