Retiring in the Next 5 Years? Do This to Protect Your Nest Egg From Market Volatility

Although U.S. markets recovered some of last week’s losses Monday on the hope that a resolution with Iran — and a resumption of oil shipments passing through the crucial Strait of Hormuz — could happen sooner rather than later, investors are still jittery, with the oil shock adding to concerns about a weakening labor market and stubborn inflation.

For people near the end of their careers, market volatility can be especially stressful. While stock gyrations can give workers of all ages heartburn, folks closing in on the time when they’ll be taking money out of a 401(k) instead of putting money into it have greater cause for concern.

If you’re planning to retire within the next three to five years, investing experts say there’s one critical move you should be making at this point in order to keep your retirement financing goals on track.

Make sure you’re properly diversified

Achieving diversification isn't necessarily a silver bullet against market losses, but it can go a long way towards mitigating those losses and providing peace of mind.

"Staying diversified is one of your biggest shields” from a whipsawing market, says Emily Safford, wealth advisor at Girard, a Univest Wealth Division, because gains in one asset class or category can help offset losses in another.

To yield consistent growth over the long term, you want exposure to different types of assets, since each one contributes distinct advantages — and can present unique risks. This is why the pros say it’s essential to keep a portfolio balance appropriate for how long you plan to stay in the workforce as well as your appetite for risk.

In practice, this means investing in U.S. and international stocks and high-quality corporate or government bonds. Mutual funds or exchange-traded funds (ETFs) present less concentration risk than investing in individual companies, so they're a good pick for most investors.

Safford adds, though, that market volatility serves as a good reminder for pre-retirees to check in on their asset allocation. The outsized gains of the “Magnificent Seven” and the tech sector more broadly can create distortions that unbalance your portfolio and expose you to more risk than you’d like.

“You want to make sure you’re right-sizing those positions so they're not taking over your portfolio,” she says.

The closer you get to retirement, the more you should shift from a more stock-heavy allocation to a mix that includes more bonds as your intended retirement date nears. Many retirement investment options do this automatically via target-date funds that rebalance on a regular schedule. You'll also want to build up your cash reserves, since this will let you take funds out of your savings for living expenses in retirement without forcing you to sell assets at a loss.

Be careful — but not too careful

At the same time, it's important not to play it too safe, says Ross Mayfield, investment strategist at Baird.

“It’s a delicate balance, but you don't want to lean away too far from equities and growth assets,” he adds, because you need your retirement nest egg to last for decades to come.

Even with CD and high-yield savings accounts generating returns of around 4%, people who view sitting on the sidelines as safer than remaining in the market overlook one big drawback, Safford warns.

“If you really look at it and net out inflation, you're almost getting nothing, so it's not really a good long-term strategy,” she says.

While diversification means having both a variety of stocks and bonds in your portfolio, it’s smarter to keep your risk concentrated in stocks, according to Lorne Abramson, founder of Abramson Financial Planning.

Historically, bonds tended to perform inversely to stocks, making them a good hedge because they would rise when stocks slipped. But this negative correlation isn’t as strong in today’s market, meaning that your supposedly “safe” money could be exposed to more risk than you intend.

“Take the risk in stocks,” Abramson says. “Why take that risk on the other side of the ledger, especially for money you think you're going to spend?”

Abramson advises sticking with safer instruments like Treasurys versus riskier corporate bonds or bond funds that might deliver higher yields but could sustain greater losses. When it comes to your bond allocation, “capital preservation is the primary risk you should be managing,” he says.

And above all? Don’t cash out in a panic, no matter how scary the headlines are. This locks in losses, whereas remaining invested gives you the opportunity to recover them later.

“The main thing during periods of volatility is you don't want to do anything rash,” Mayfield advises.

Over a 20-year period, seven of the market’s 10 top-earning days occurred within 15 days of one of the 10 worst days. An analysis found that investors who remained in the market over that period earned returns nearly twice as high as those who missed just those 10 best days.

"If you're already experiencing market weakness, you probably want to ride it out," Mayfield says. Remember, he adds, "You only have paper losses until you sell."

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