When markets are volatile, many investors let emotion rule their decisions. Some panic and sell expensive assets at market lows, erasing their portfolio gains. Others sit tight on assets like cash that seem safer out of the market entirely, but then miss out on generating portfolio growth or offsetting losses.
If you’re saving for long-term goals like retirement, it’s natural to want to hold onto assets like cash to protect what you’ve already earned, because there appears to be little or no risk in just riding out the market instability in these investments.
But there’s a hidden risk in sitting tight in cash: losing opportunities to generate meaningful lifetime income from that cash. That’s why your financial plan for retirement should focus on your long-term goals instead of short-term market moves.
A portfolio needs assets that can keep up with or even outpace inflation through all market cycles.
Balancing risk and opportunity
As you get closer to retirement, accumulating assets should be balanced with preserving those assets and generating future income—it requires a diversification strategy that can flex to capitalize on opportunities and address risk.
When it comes to risk, market volatility often grabs the lion’s share of investor focus because of its headline-grabbing unpredictability. But another core risk to portfolios is one that can be easy to ignore until it strikes: inflation.
People tend to focus on the inflation they experience now without considering what it might mean for them (and their portfolios) in the future. But inflation quietly erodes purchasing power over time, which can strain the resources of people living on their retirement savings. If you’re complacent when inflation is low and remains steady, you may not consider it a threat to your investments or lifestyle.
That’s why a portfolio needs assets that can keep up with or even outpace inflation through all market cycles—not only when it spikes.
Inflation: The quiet erosion
Annual Rate of Change for Consumer Price Index for All Items in U.S. City Average (1/1/1970-6/1/2024)
Source: Calculation based on St. Louis Fed FRED Database. https://fred.stlouisfed.org/series/CPIAUCSL
Understand the alternatives
“Safe haven” investments play a role in portfolios, but understanding your options—including their risks—can help you secure your retirement and protect against inflation in the future:
- Cash: As we’ve discussed, a stuffed piggy bank feels secure, but you may be missing out on opportunities.
- Bonds: Traditionally less volatile than equities, but tend to lose value when interest rates rise.
- CDs: The high rates you’re locked into today can become the low rates of tomorrow.
- Annuities: Registered index-linked annuities (RILAs) and fixed indexed annuities (FIAs) can provide additional diversification and help balance cost and risk with the need to protect and generate income over a lifetime.
Learning about the benefits of annuities and other cash alternatives that can both protect and grow your savings can help reduce your concerns about losing purchasing power in the future. Ask a financial professional for recommendations that fit your needs.
