It is interesting that folks (even financial "experts") tend to judge the viability of the financial market on current performance or circumstances. Advice to retirees on how to allocate assets tends to be optimistic or pessimistic - depending on the current situation. When there is a sharp downturn in the stock market, retirees are advised that being conservative is the key. On the other hand, "experts" advise that stocks are the solution to the risks of retirement if the stock market is buoyant.
Although it is natural for current circumstances to dictate the approach to market risk, it is not prudent to sway with the trend. The corollary of following the trend is selling in the bear market and buying in the bull market. In the short run, that may seem rational but it is an ineffective, emotionally driven market strategy. Finding the optimum balance with market risk is the answer, albeit a somewhat tricky one. Fortunately, retirees can use some methods to manage market risk during retirement.
== Portfolio diversification ==
The simple investment strategy of allocating funds over different asset classes never gets old. Retirees can manage the "Where to invest" dilemma by spreading the risk among cash, income and growth options. Since there are investment risks with all options - even safe options - this strategy ensures that retirees can get the best of many worlds.
== Buy cheap ==
The most expensive stocks and mutual funds do not necessarily bear the highest returns. What is important is the price of a stock relative to the earnings or net asset value. Therefore, having a higher volume of stocks across different sectors is a lot better (and safer) than having a few high priced stocks. In addition, buying cheap is applicable to taking advantage of the bear market. Many investors sell out of fear when they should be buying. Reinvesting dividends in falling stocks can be a good way for retirees in the early stages of retirement to consolidate their portfolio in leaner times.
== Use annuities ==
Annuities are income options that shield the annuitant from market risk by offering base guarantees. Retirees can use immediate annuities to manage the risk that they face by having guarantees against loss in return for lifetime income. This moves the burden of investing from the retiree to the insurer, albeit at a price.
== Choose dividend-paying investments ==
Dividend-paying stocks are generally less volatile because they are invested in relatively more stable growth options. Dividend paying stocks are also a great way for retirees to supplement their retirement income through investment.
== Guard against bond price volatility ==
Protect yourself against volatility by buying shorter-term bonds. Bonds that have longer investment periods have higher interest rate risks. While bonds are the preferred option for risk-averse retirees, it is important to prevent loss through bond price volatility by keeping your bond portfolio flexible. It is also important to select bonds that have a higher credit rating - like Treasury bonds and government bonds.
== Avoid greed ==
Retirees can capitalise on returns by shifting investments when returns exceed expected returns. It is tempting - even for retirees - to ride the highs of the market. Not having a proper exit strategy can expose retirees to downturns that result in severe losses. This happened with the economic recession of 2007. Many retirees lost a substantial portion of their nest egg because they continued riding the wave. At any age, you must invest with a plan and have expected returns. If the market exceeds these returns, it is prudent to save the excess.
Risk is unavoidable, once you decide to save and invest. However, market risk is manageable. Given that retirees generally have shorter investment horizons, market-risk reduction is vital.
