What You Need to Know
- Worries about inflation, banking sector instability and surges in market volatility have put a lot of investors on the back foot.
- For retirement-focused investors, however, there are attractive pockets of opportunity, especially in long-duration bonds.
- More important than predicting a recession is preparing for ongoing portfolio stress, experts say.
Investors who are in or near retirement have a lot to consider in the present moment.
On the one hand, worries about inflation, banking sector instability and surges in market volatility have put a lot of investors on the back foot — especially retirees who do not have long time horizons to allow depreciated assets to recover.
At the same time, though, investors focused on meeting retirement income goals can now lean on much higher yields in both the government and corporate bond sectors, and there are hopes that cooling inflation data could allow for the U.S. and global economies to achieve the illusive but much-desired “soft landing” and avoid a serious recession.
According to Brett Wander, chief investment officer for fixed income strategies at Schwab Asset Management, 2023 represents a crucial time for retirement-oriented investors. In fact, for Wander, the current moment in the markets makes it easy to point to the “single most important investment consideration” for retirees today.
“The most important thing for a near-retiree or a retired investor to do today is to pause and truly rethink your asset allocation and to be humble about the amount of risk you can take,” Wander says.
“This is hard for some people to do in the wake of a multi-decade bull run for stocks, during which investors have been rewarded for carrying arguably excessive risk in the portfolio,” he adds.
A Special Time
Wander offered this perspective on a wide-ranging webinar hosted by T. Rowe Price, during which he shared the digital floor with Andrew McCormick, T. Rowe Price’s head of global fixed income and chief investment officer.
According to bond experts, retired investors cannot assume that the current bout of market volatility and economic uncertainty will yield to another historic bull run that lasts 10 or 20 years. It’s just not very likely from a historical perspective, they agreed, and as such, retirement investors have some serious soul-searching to do with respect to risk-taking in their portfolios.
Simply put, Wander and McCormick agree, retired investors should focus on the tried-and-true fundamentals for generating stable returns to fund income needs, through approaches such as bond laddering and by strategically taking advantage of higher yields in long-term, safe government Treasurys and private market bonds.
A New Sense of Risk
“It’s obvious, but as you get older, your investment time horizon shrinks, and that means it is important to become cognizant of risk in a bit of a different way,” Wander suggests.
“When you are in your 20s and 30s, fixed income probably isn’t playing a major role, because your portfolio’s time horizon is so long and you have a real ability to withstand even big ups and downs in the markets,” he explains.
For most retirees, that’s just not the case, and sequence of returns risk becomes a dominant factor in financial planning.