Those invested for retirement need to be patient and well-balanced.

The latest market drop may turn out to be a simple short-term correction. However, market downturns (at this writing on 8/11/11, a -17% decline) are a source of worry for retirees, as they could influence their quality of life, particularly if a retiree doesn’t have the appropriate asset allocation. The recent market sell-off may be scary if you are retired or approaching retirement. Regardless of how you feel, here are a few takeaways for retirees and their investments:

1. The decade of the 1970’s wasn’t so groovy, yet we survived it.

Unemployment, student protests and a poorly performing stock market eventually went out of style—however we should remember—it wasn’t without a struggle. To help illustrate how those times felt, take a look at the five-year period following the stock market crash of 1973-74:

The tepid economic recovery of the Seventies was difficult; and we saw several downturns of 10% or worse that investors had to weather. The point is that recoveries don’t feel good. Stocks will experience volatility—especially after a large downturn.

2. After market declines; there are recoveries.

Certainly nobody would disagree; the market crisis and stock market decline of 2008-2009 was no picnic. But keep in mind that has already occurred. As we stand here in 2011, we are in the midst of the third year of a market recovery. Market declines have historically been punctuated by meaningful recoveries.

• The average annual total return for the five-year periods after each decline was positive
  100% of the time.

3. Asset allocation is a retiree’s friend.

Retirees need income to meet their lifestyle expenses, yet many do not have pensions and rely upon withdrawals from their investment portfolios. Asset allocation becomes the most important decision whereby the portion of assets in fixed income becomes the lifeline. A professional money manager for an institutional pension fund must take the same approach to withstand today’s prolonged economic recovery. Retirees should plan accordingly and allocate resources so they do not have to touch their stocks during a market decline. Bonds, real estate, cash and alternatives can be good substitutes.

4. Slow economies don’t last forever—and businesses are the driving force behind recoveries.

Heightened volatility and discouraging stock market results make the past 10 years seem like a “lost decade”. History shows, however, that investors can be optimistic about the future. A quick check shows that U.S. corporations have been strengthening their financial positions since 2000:

Summary. In times like today, which include stock market downturns, being a retired investor is not so easy. On the positive side, there have been historically strong recoveries after market declines; with the average recovery being a +18.95% annual total return. We are in year three following the 2008-2009 market crash. Keep in mind; a smart asset allocation plan will get you through these frustratingly slow times.