Handing over responsibility for your retirement to the stock market can feel like putting your hand into a fire. You know you want to earn returns, but you are worried about volatility, particularly as you get older.
That raises an important question: should you hand over responsibility for your retirement to the stock market at all? You’re about to find out. We take a look at some of the factors you’ll want to consider before you make any decision to pull your money out and invest elsewhere.
Risk Tolerance
The first step is to consider your risk tolerance. You want to figure out how much volatility you are prepared to accept while keeping your money in stocks.
Equities can fluctuate massively over the short term. We’ve seen this several times recently across markets. It is not uncommon to see peak-to-trough declines of 50 percent or more.
This action shakes out many people who aren’t in the markets long term. However, they can also damage long-term investors if you need to draw down on your devalued capital in the short term.
For this reason, many investors seek alternatives. With Certificates of Deposit rates rising, many people coming up to retirement view these as a viable alternative. CDs offer higher returns than conventional draw-down savings accounts but guarantee a payout at the end of the term, unlike equities.Â
Time Horizon
You also want to consider your time horizon or how long you want to remain in the market. If you are approaching retirement, chances are that you want to draw down on your funds instead of trying to grow them.Â
This changes the nature of your investments. While the stock market promises long-term returns over the course of decades, it can fluctuate significantly in the short term. The same is not true of the bond market, where bonds pay fixed coupons regardless of conditions in the economy as a whole or specific companies in the market.
Financial Goals
You also want to consider your financial goals: that is, how much income you need and when you plan to retire. If retirement is still a long way away, then investing in stocks could be a powerful way to build your wealth and live the lifestyle that you want. Stocks typically double in a decade, whereas fixed investments might only grow 50 percent or less.Â
At the same time, the expected value of equities is often quite different from their actual value. Sure, they can go up in spurts and the years 2017 and 2021 are good examples of this. But they can also fall substantially, as they have in 2022 and 2023. Recovery can take years, interrupting your enjoyment of life and forcing you to constantly keep one eye on the markets whenever you make financial decisions.
The same does not occur when you choose a fixed-income investment. These might offer lower returns, but they eliminate annoying volatility and help you plan more consistently for the future.Â
So that’s our take on whether you should hand over responsibility for your retirement fund to the stock market.
