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Managing Assets For Retirement

Typically, the word “volatility” refers to daily changes in the prices of stocks or bonds. Volatility affects the market value of your retirement portfolio. Thus, volatility is a topic that deserves special consideration when managing retirement and pre-retirement assets.

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Managing Assets For Retirement

Typically, the word “volatility” refers to daily changes in the prices of stocks or bonds.
Volatility affects the market value of your retirement portfolio. Thus, volatility is
a topic that deserves special consideration when managing retirement and pre-
retirement assets.
I’m Bill Stone, Chief Investment Strategist for PNC’s Asset Management Group.
Retirees, who may rely on investment dollars and income, and those nearing
retirement, are particularly vulnerable to market shifts. In order to take volatility into
account when investing for retirement, you should consider:

  • the importance of asset allocation
  • systematic rebalancing
  • building a cash reserve
  • establishing an income floor...and...
  • staying invested (not panic selling)

We know that, over the long term, stocks have tended to produce significant positive
real returns after inflation.
We also know that the longer-term upward trend in stocks includes shorter periods
of market declines or disruptions. An investor can experience significantly higher- or
lower-than-average returns in any given year.
Asset allocation can address volatility and your risk tolerance as well. A mix of assets
can reduce volatility through diversification.
Since 1926, 28% of stock market and 8% of bond market returns were negative on
an annual basis. However, only rarely (about 2% of the time) did stocks and bonds
post simultaneous annual negative returns. Therefore, managing the stock/bond
allocation can have a significant impact on the stability and predictability of portfolio
performance.
Once an asset allocation has been set, it is important to re-evaluate the portfolio
from time to time, especially in the following circumstances:

  • systematically (on a set time frame, such as annually)
  • to reassess any changes in personal life circumstances; and
  • in response to changing market conditions.

Take for example, two investors, each with an asset allocation target of 65% stocks
and 35% bonds from the end of 1994 through November 2013.
Investor A rebalanced the portfolio back to the target allocation at the end of each year.

Investor B made no changes during the period.
As you can see, the simple, systematic strategy significantly outperformed the do-
nothing strategy.
Retirees should consider building a cash or income shield.
Cash here refers to any safe, near-liquid investment. This could include money
market mutual funds, bank certificates of deposit, or Treasury bills. These
investments produce only modest returns even in the best of times and near zero
returns in the current environment, but the stability they provide can help protect
against becoming a forced seller.
It is possible to reduce volatility risk by investing the money needed in the next few
years in these conservative investments, while maintaining normal allocations
with the money earmarked for use over longer investment holding periods. A
prospective or current retiree should consider setting aside at least a year of
expenses to provide an adequate cash reserve.
With retirees living longer and retirement periods lasting longer, preservation of
capital is vital.
The term “income floor” refers to cash generated from a retiree’s investment
portfolio. In assessing a retiree’s total cash needs, noninvestment income is added
to investment income.
Under this method, a floor of predictable cash flow streams is built first, before
investment in anything riskier.
Managing retirement assets just before or during retirement may understandably
decrease your risk tolerance level. Don’t panic. Creating a long-term strategy and
maintaining it as the market moves is the best way to achieve your retirement
investment goals.

For more information on navigating the complex path to a successful retirement,
please visit us at pnc.com/investmentcorner. Thank you for your time and attention.

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