Contributed by: Lewis J. Walker, CFP®
Outside of government agency guaranteed savings or insurance company guarantees, market volatility is a fact of life. Take the stock market. Volatility is normal and must be considered in framing your personal Investment Policy. Since we can only theorize the future but not predict the future, expecting and learning to live with volatility is a rational approach.
If you focus on the daily news, you always will find reasons to be nervous. When you are employed and feel secure with a regular paycheck, you don't worry so much about market gyrations. In fact, you may welcome the opportunity to add money to retirement and savings plans when Wall Street is on sale. "Dollar-cost-averaging" works.
When you retire and no longer have earned income from working, your sensitivity to volatility increases. Your nest egg becomes your "paycheck source," and you worry more about negative news and market declines. Managing volatility is a critical component of asset management. The goal is to make market volatility largely irrelevant to your long term peace of mind.
We are potentially in the latter stages of a long economic expansion. We saw a run up in market averages post-election based on hope of change such as tax and regulatory reform. As President Trump confronts a divided electorate and Congress, reforms may take longer than expected, and perhaps be watered down. As of April 13, from a March 1, 2017 peak, the S&P 500 index is off -1.76%, the Dow down -2.19%. A January 27, 2017 Market Bulletin from J.P. Morgan Asset Management attempted to put volatility into perspective.
As one who likes cruising and being at sea, it’s easy to relate to the analogy of sailing, recognizing that "the free market, like the open ocean, is constantly churning." Market moving waves may vary from "small ripples, to rolling waves, to a financial crisis-sized tsunami." With roughly 10,000 Baby Boomers retiring every day, a growing cohort will depend on distributions from retirement plans for "paychecks." With memories of the 2008 market debacle still top of mind, any crisis could stir a stampede and exacerbate a market decline. Since successful market timing is difficult to impossible, one should have sufficient low risk to “no risk" reserves to ride out declines we know will happen.
Over the three years spanning the 2000-2002 "tech wreck", declines of 5% or more in the S&P 500 average ranged from 11 to 14 per year. In 2008 there were 24 declines of 5% or more. Looking back to 1980, a chart in the J.P. Morgan bulletin tracked S&P 500 intra-year drops averaging 14.2%. Despite the short-term thumping, the market ended the year higher 76% of the time. We are compelled to state that past performance is not indicative of future performance. You need staying power so you can ride the volatility wave to the next crest. You do not want to be forced to “sell low” during a decline to run your life.
On October 19, 1987, a global market crash started in Hong Kong and spread to Europe, tanking U.S. markets with loses over 20%. For the year, the market finished up 2%! A pullback of nearly 50% in 2008 tested investor patience and rattled confidence. Those who bailed out missed one of the all-time great rallies that begin in the spring of 2009. Some of the worst days in the market occur very close to the best days.
At a minimum, individuals and couples should have at least a year’s worth of income in a FDIC-insured money market fund to deal with emergencies, job interruptions, etc. Too many people raid their 401(K), suffering penalties and opportunity costs. Post-retirement, we urge a “paycheck fund” of 3 to 5 years worth of monthly cash flow needs in a safe and or low risk repository. Call it a “bucket strategy” that may be beefed up with cash flowing alternative investments or high dividend stock portfolios.
Famed mutual fund manager, Shelby Davis, said, “You make most of your money in a bear market, you just don’t realize it the time.” Warren Buffett echoes that sentiment, seeing a market slump as “an opportunity to increase our ownership of great companies with great management at great prices.” True. But you need a strategy to shut out market noise so you can sleep at night. That’s part of a long range financial plan.
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. This information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. There is no guarantee that any opinion or suggested possibility will happen.