By Anthony C. Kure
Many of us fondly look back on the 1980’s. The music, TV, movies and style are distinctly memorable. For savers and retirees, there is nostalgia for the higher interest rates. These higher rates on bonds and cash, sometimes in the double-digits, generated healthy income. Some retirees could fund all their needs with the interest income from a portfolio of all bonds. When supplemented by Social Security and even a pension, much more common then, investors were less dependent upon stocks, and as a result, less concerned about volatility.
Today the notion of living off bonds alone is unrealistic for a vast majority of investors. Yields on the 10-year U.S. Treasury note are less than 1%. High-quality corporate bonds yield a little more, but not much. So retirees living off their investment portfolio need a growth engine to keep up with inflation and sustain purchasing power. That growth engine is stocks.
Stocks have a long track record of outpacing bonds, but at a cost. 2020 has served as a reminder that stocks can generate gut-wrenching paper losses. Without the proper approach and mindset, these market declines sometimes lead to panicked reactions. Some simply can’t endure and decide to sell all their stocks in hopes of avoiding further pain. This reaction may provide a little better sleep in the short-term, but it also locks in permanent losses, jeopardizing the success of a retirement plan.
So what can be done to avoid such a disaster?