Navigating Market Volatility: Should You Move Your Money from Stocks Before Retirement?

The question of whether or not to move your money from stocks before retirement, especially in the face of potential market crashes, often arises as we approach the golden years. As one nears retirement or is already in it, the focus shifts from capital gains to generating and growing income. In this article, we delve into the rational behind retaining stocks and suggest strategies to navigate this complex financial landscape.

The Shift in Investment Strategy

In the general phase leading up to or during retirement, the emphasis is on income rather than capital gains. For the average earner, this means ensuring a steady and growing stream of income to meet daily needs and maintain lifestyle expectations. However, it is crucial to recognize that for the extremely wealthy, this calculus is much less impactful, as they have alternative assets and income streams to rely on.

The Power of Dividend Stocks

Companies that have consistently increased dividends year over year are known as “dividend kings” or “dividend aristocrats.” These stocks, such as REITs (Real Estate Investment Trusts) and blue-chip companies, offer a reliable income stream that may continue even during market downturns. Therefore, in the event of a stock market crash, investors who hold these dividend-paying stocks benefit from continued income.

For instance, a REIT like AGNC, which pays about 14% in monthly dividends, can provide a significant income source. Investors in AGNC should monitor the company closely and be prepared to sell if the stock performance deteriorates. Similarly, a small financial institution like FUNC, a western Maryland bank, might be a speculative but potentially rewarding investment. The key is to not expose the entire portfolio to such high-risk investments.

Tactic: Diversified Purchasing for Better Control

A smart strategy to handle the potential need to sell stocks involves buying them in smaller quantities. For example, instead of buying 1000 shares at once, divide the purchase into smaller lots. By doing so, investors can better control the capital gains or losses when selecting which shares to sell. This can be effectively managed through online brokerage platforms that allow for frequent buying and selling from a computer.

Protecting Your Portfolio with Diversification

Diversification is key to managing risk. Investors should not put all their eggs in one basket. This means holding a mix of stable dividend-paying stocks and speculative ones. Holding a diversified portfolio can help mitigate the impact of a market crash on the overall returns.

Conclusion

As one approaches or is in retirement, the focus shifts to income generation and preservation. Retaining stocks, especially dividend-paying ones, can provide a safer and more secure income stream. However, strategy is essential. Buying stocks in smaller quantities and diversifying the portfolio can provide better control when it comes to selling and minimizing tax impacts. Additionally, a portion of the portfolio can be allocated to speculative deals, like a highly promising REIT or a small bank, to protect the majority of investments from high-risk bets.

Ultimately, navigating the complexities of market volatility and investing wisely requires careful planning and a balanced approach to diversification and income generation.