“I can’t afford another 2008, should I be invested?”

Over the last 16 months, I have heard this question numerous times. This may be due to the stock market consistently hitting new all-time highs, or the media instilling a notion that what goes up, must come down. Now, I am not about to say that the stock market won’t come down from where it is today, but what do we do in times of increased volatility and political and global uncertainty? Should the retail investor go to cash or money market instruments at each intersection of fear to avoid recessions or market crashes?

This is where I could go into a rabbit hole of behavioral finance and the argument of which is better—timing the market or time in the market? But I won’t. What I will ask you, is what factors are guiding your investment decisions?

The majority of the time that I hear someone say that 2008 was brutal, they’re someone nearing retirement. They’ve been accumulating wealth ever since they began working and saving for their future and now they’re entering the wealth preservation stage of their life. Now it is their time to retire and live off their retirement income and investment assets, and a 30-40% drop in the market would derail them.

Can you afford not to be invested in the stock market?

The answer to this depends on how much you have saved for retirement, how much you have set aside in cash reserves, and how you are allocated in fixed investments vs. stocks. Someone with a large shortfall in their retirement savings may not be suited for investing in the market.

Let’s say a couple is retiring with $500,000 in their retirement accounts and needs $70,000 a year for living expenses. They will supplement this with their combined social security benefit of $40,000 and will need to draw from their investments at $30,000 a year. If inflation is a mere 2.5%, then your money will last 13.75 years if you are in cash.  Yet if you remain invested and yield 5% annually, your money will last you 21.8 years.

It is true that inflation erodes the dollar’s purchasing power. Remaining in the market helps retain purchasing power over the long term, which you already know. There is a risk/reward relationship in investing. You want the reward from the risk you are taking in the stock market to beat inflation; , but you don’t want extreme recessions that come with that risk.

How often do recessions like the Great Recession occur?

Major economic downturns tend to happen every 30-35 years. The last broad and long-lasting market drop was back in 1973-74 during the oil crisis. You couldn’t even put your money into bonds at the time, because they were also on the decline—there was no place to hide. Does this mean that we should expect another crash in 20 years and prepare to go to cash? No. It’s better to prepare for the worst and hope that someone retiring today will not see another Great Recession in their investment lifetime. I will most likely see a few more large market downturns in my investment lifetime.

What can be done about it?

Every investor can benefit from separating their emotions from their financial decisions, no matter what the stage of the market. Our emotions can often lead us to harmful financial decisions. This brings me back to my earlier question: What factors are guiding your investment decisions? If you don’t know what guides your portfolio or the principles that guide those processes (such as asset-allocation, rebalancing, or investment selection), ask your financial practitioner. If you don’t have one, find one that will hold you accountable.

Planning for Uncertainty

Knowing that you have enough set aside in safer investments, like bonds or CDs, to meet your future living expenses will hopefully allow you the peace of mind to allocate a portion of your investments for the volatility needed to outpace inflation. This is the application of a target asset-allocation on a portfolio to meet two financial objectives: short-term security and long-term growth potential. Remember, your investment time horizon isn’t until you retire, it’s until you no longer rely on the growth of your portfolio to meet your financial goals and living expenses. With guidance from an experienced financial counselor like John Moore Associates, you can better prepare for and minimize your risks from a potential crash, while intelligently building for your future.

Any opinions are those of Andrew Donohue and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.  This is a hypothetical example for illustration purpose only and does not represent an actual investment. Diversification and asset allocation do not ensure a profit or protect against a loss. Rebalancing a nonretirement account could be a taxable event that may increase your tax liability.

 

 

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