Over the
past five decades, which spans most of our investing lifetimes, we have seen
dramatic market declines at least once every decade. In the 1970s, it was an oil
crisis. In the 1980s, there was extraordinary inflation. In the 1990s, we had the tech
bubble. In the 2000s, we had both 9/11 and the financial crisis of 2008. The
2010s were bookended by the European debt crisis in 2011 and market volatility
in 2018. To begin the 2020s, the global markets have been shaken by the
coronavirus.
In the midst
of any crisis, the most challenging time for investors is when they are looking
at steep declines in their portfolio and wondering whether prices will continue
to fall. During these times, we expect our clients will be concerned,
especially retirees who rely on their portfolios for living expenses in
retirement.
We cannot know
when the next downturn will occur, and when it does, whether it will be a 10%
dip, a 20% correction or the larger drops like this year’s 30%+ stock market
fall. Data suggests nobody else can either. What we can do is cushion the decline
your portfolio experiences by holding a portion of your portfolio in bonds.
We set your
stock/bond allocation such that you can live through these declines because we
have seen what follows when clients “go to cash” during a market downturn —
they inevitably wind up worse off over the long run. Even if they manage to get
out before the worst of the decline, they inevitably wait until “things are
better” at which point they have missed out on much of the recovery. We know
this to be true as it has happened time and time again.
There are
two points that are very important for retirees:
1. Recognize that we are planning for
decades of withdrawals in your financial plan. The ups and downs of the market would
be very problematic if you had to withdraw everything at this point in time,
but most retirees withdraw a little bit each year for many years. When we calculate
your sustainable spending rates, we factor in that you will likely live through
multiple major downturns while you are taking your withdrawals. We use academic
and empirical evidence going back to the 1970s to design our portfolios, so
they are appropriately diversified to withstand these kinds of downturns.
2. During the worst of these downturns,
you may think midway through the crisis that you have taken on more stock
market risk than you have the stomach to endure. If you are feeling so anxious that
you are tempted to veer from your long-term plan, then you should reach out to
your advisor.
There are
several steps you can take if you find yourself at that precipitous emotional
crossroads. Here is the course of action that you should take:
1. Let
your advisor know that you are not comfortable.
Tell your advisor these market drops are more than you want to bear in the next
market downturn. There may be some alternatives that you have not thought of
that your advisor can walk you through.
2. Retake our risk tolerance questionnaire.
If you do this now
with your advisor, you can better understand how you feel from a risk
perspective during difficult times, so you are not tempted to take on more risk
during good times.
3. Hold tight. Stay invested in the markets for
now. You have experienced that first steep drop on the roller coaster, and
there will likely be a few more with smaller bumps (up and down) ahead. But
stick with your allocation and make any changes once your portfolio has
recovered.
4. Talk with your advisor about what you
should change about your investments for the long term. Rather than taking action in the
short term, have a discussion with your advisor about permanently shifting your
stock allocation down by 10%, 20% or even 30% less stocks. But importantly,
hold off on doing so until after markets and your portfolio have recovered.
5. Understand what this allocation
change would mean for your retirement. A lower stock allocation usually means spending less because
the expected return from a portfolio over retirement will be lower. If the
allocation change would make the sustainable spending untenable, then
compromise and find a percentage that meets your spending needs but still
limits future risk more than the current allocation.
6.
Speak with your advisor about immediate and no-commission annuity
products. Many annuity products on the market
are unsuitable, but we have access to some that could be appropriate. If
you are considering one of these products, your advisor can evaluate whether
such investments are appropriate for you and suggest alternative strategies
that do not involve market risk.
Our advisors
have worked through downturns with many clients in the past. The future is
never certain but putting a plan in place for what you will do can give you
confidence to weather this and any market decline.