I'm a Financial Adviser: This Is How a Balanced Portfolio Builds Confidence Despite Market Storms

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Volatility isn't new, but in today's environment of interest rate uncertainty, lingering inflation and geopolitical conflict, the swings can feel more intense.

Add in a contentious political environment, and it's easy to see why many savers feel unsettled. Yet history continues to show: Disciplined investors are the ones who do best over time.

Retirement savers should stay informed about their portfolio performance, but obsessing over every news cycle or market drop can lead to emotional decisions that derail long-term plans.

Markets will always move. A new inflation report, a Federal Reserve policy shift or even a viral headline can send stocks higher or lower.

The challenge is separating short-term noise from long-term fundamentals. For those with many working years ahead, the best move is often to remain steady and avoid reacting to every dip.

Diversification: Your best defense against market swings

For clients nearing retirement, the stakes are different. A poorly timed downturn can jeopardize years of savings, particularly if withdrawals begin while values are depressed.

This is called sequence-of-returns risk, and it can have lasting consequences. Diversification is one of the most effective ways to mitigate it.

Balanced portfolios allow flexibility. By spreading investments across different "buckets," such as equities, bonds, annuities and cash, retirees can draw from the most stable sources when markets are turbulent, preserving growth assets for recovery periods.

Consider this: A retiree withdrawing $5,000 annually from a $500,000 portfolio heavily invested in growth stocks may only sell about 1% of their holdings in a flat year.

But in a steep downturn, that same $5,000 could represent well over 1% of the portfolio. Selling more shares at a lower value means fewer shares are left to rebound, causing a permanent loss of potential growth.

A thoughtful mix of stocks, bonds, annuities and even life insurance can reduce that risk. The right balance depends on goals, risk tolerance and time horizon.

For those approaching retirement, prioritizing income-generating and principal-protecting assets like bonds or money market funds can help safeguard wealth while keeping a foot in growth opportunities.

Balancing growth, inflation and liquidity in retirement

Protecting principal matters, but growth cannot be ignored. Even with inflation moderating from its 2022 highs, retirees today still face higher prices for essentials like health care, housing and travel. Without ongoing growth, purchasing power erodes over time.

This is where planning flexibility comes in. Retirees might explore income sources outside of traditional investments, from rental properties to consulting work, or adapt expenses by downsizing a home or spreading out large purchases.

Maintaining liquidity is equally important. A cash reserve of one to two years' worth of expenses, kept in accessible interest-bearing accounts, provides a safety net for unexpected costs such as medical bills or home repairs.

This allows retirees to weather emergencies without tapping market-dependent assets at the wrong time.

The bottom line: Confidence comes from discipline

Volatility is part of every investor's journey. Some years will bring strong gains, others sharp declines. What matters most is maintaining discipline, sticking to a strategy and working with a trusted financial professional who can help navigate uncertainty.

With the right preparation, investors can move through market storms with confidence, knowing history shows recovery always follows.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.