Volatility in Retirement Investing

Seeking greater investment return often means you'll need to accept more risk. Typically, the greater the risk, the greater the potential rate of return. We often describe risk in terms of volatility, i.e., the amount your investment values fluctuate up and down over time. Volatility potentially can work in your favor during the accumulation investment phase. It becomes more of a concern when you need to withdraw money, because it may be during a period when the markets and account values have declined. 

Stocks: volatility and return 
Historically, stocks tend to have the highest long-term rate of return compared to bonds and cash. Of course, they also have the greatest risk due to their higher volatility. The longer the period of the investment, the lower the volatility, because the long-term growth trend of a stock tends to overcome short-term price drops. If you are close to retirement, you may want to stay away from investments that are more volatile. However, if your retirement is still many years away, it may pay to invest in these volatile markets. Let's say you invest a lump sum of $100,000 in a highly volatile asset returning an average annual rate of return of 10% over 25 years. The year you retire, it suddenly drops by 25%. The value of your investment after the drop is $813,000. If you had invested that same $100,000 lump sum in a less volatile investment with a 6% return and experienced no 25% loss in the final year, you'd still have only $429,000 after 25 years. So even with a significant loss, it paid to invest in the more volatile investment. 

While volatility increases the risks of an investment, its potential to increase returns makes it worth seeking if you have a long time to invest for retirement. 

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