Here is a picture you might relate to. You’re a retiree with a respectable investment portfolio, including annuities, but you still periodically have to sell shares of stock, ETFs or stock mutual funds to balance your household budget. This was a snap last year as stocks kept climbing, but this year is an altogether different story.
Stocks have been moving up and down, sometimes sharply, but ultimately doing virtually nothing. Worse yet, the outlook between now and the November mid-term elections is for more of the same and could easily be worse, especially if trade negotiations with China falter.
Investors hate uncertainty, and the elections certainly create plenty of that. One recent study has found that the Dow Jones industrials have produced an annualized gain of just 1.4% in the six months before midterm elections since the beginning of the 20th century. It could easily be worse this time around because the bull market is unusually old and creaky and very expensive, notwithstanding stellar corporate earnings..
Market crashes in 2008, 2000 and 1987 had no clear-cut catalysts. What they did have in common, however, was that the market then, as now, was sharply overvalued.
Stock market corrections and more severe bear markets worry most investors, of course, but they are worse for retirees for two reasons – the psychological impact and the impact on routine, day-to-day financial management. Psychologically, an extended downturn breeds fears that the market will be weak much longer than expected and could impact your financial security at a point when you are no longer working. In addition, when you sell stock to help pay bills in a down market, it digs a deeper hole in your portfolio, making it tougher to generate expected long-term returns.
This is not to say that the market is headed down for a prolonged period. We may just see essentially more of the same or, with luck, a bit better performance. But it’s prudent to anticipate some trouble over the horizon and plan accordingly to keep your financial planning goals intact. To this end, here are some tips:
- Make sure your stock allocation is where you and your investment advisor decided it should be long-term. Many people may have higher stock exposure than they think after a stellar 2017 and other strong markets in relatively recent years. So, make sure your portfolio is being balanced periodically. If your stock allocation has surged past 60% – a common guidepost for stock exposure, especially for retirees – it probably should be pared back.
- If the market embarks on a prolonged tumble, consider scaling back some spending. Not all retirees spend less in retirement than when they were working, especially in the early years. If you take two to three nice vacations a year, maybe one annually will suffice for a while. And maybe you can keep your five-year-old car another year. You get the picture: Money doesn’t grow on trees.
- Make the effort to calculate how much of your monthly budget would not be covered by fixed sources of income, such as Social Security and annuity payouts. An easy way to do this is to add up all the money withdrawn from bank and investment accounts in the past year. If the market starts sliding, consider creating a cash reserve big enough to sidestep these withdrawals for a year, a useful psychological buffer. A one-year reserve should be sufficient because most corrections last well under that. Bear markets last longer, but, if necessary, you can add to your reserve as time goes on.
- Don’t attempt to try to time a market downturn. Regardless of what anyone tells you, it is not possible to consistently do so correctly. Market tops and bottoms are clear only in hindsight. Pay attention to what the market has been doing in recent months, not to what you think it might do.
- Make sure you are comfortable with your quantified risk tolerance, and that your portfolio matches this. And be realistic. The worst thing you can do is panic amid a downturn and sell far too many stock, ETF or stock mutual fund shares, absorbing a permanent loss that could have been avoided. Make sure you have what investment advisors call a formal risk score, and that your portfolio matches it, judging from historical data.
- Should a bear market develop – you’ll know because it lasts at least a year — be patient. If you are invested in good ETFs or managed stock funds, you will be OK in the end because the stock market has always continued to rise. In the interim, meanwhile, take financial news in stride. News mostly reports what is happening now – not what will be happening a year from now.
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