We’ve heard a lot of them in the past month! Thank you! This is a great opportunity to review our financial planning philosophy and why it works. So, let’s get to it.
Of course, a set of questions like this are necessarily general and may not answer your specific situation or concern. If that's the case, please contact us.
Before moving on, we need to stop and acknowledge, thank, and express our deep gratitude for those on the front lines of the pandemic battle-- health care professionals, public health managers, the elected officials charged with leading an intelligent course, those who continue to work and in so doing, put themselves at risk.
We salute you!
1. Wow, this has been a big market drop! Should I do something with my portfolio?
Yes, it’s been a big drop. Not only that, it’s been the quickest drop ever of this size. So, it’s not surprising and quite natural to want to do something. Behaviorally, our evolutionary wiring sees this as a threat. So, our first reaction is to flee or fight.
Unfortunately, “doing something” means to react emotionally, and in investing, that’s usually the worst thing to do. Successful investing is highly counter-intuitive. You’re better off to notice your urges and do the opposite! Or as Jack Bogle said, “Don’t just do something. Sit there.”
2. But will I be OK?
Plans are intentionally designed with conservative biases and assumptions. Most plans have long-term return estimates of 4%-6%. Remember that financial planning is designed to help you reach your life goals. So, we need to be historically consistent with what we think the markets will give us. This actually increases the likelihood that your goals will be attained.
3. When will this bear market end?
No one knows. What we do know is that since the end of WWII, there have been 46 years with declines of at least 10%. But only four of them have gone farther than this one-- 1974, 1987, 2002, and 2008. And here’s the really great news: Every bear market, without exception, has set the stage for an advance to new all-time highs. But investors needed to grit their teeth, behave counter-intuitively, and not succumb to emotions in order to benefit.
4. How will I know when a bear market is over?
You won’t. And neither will anyone else. A few years down the road, we’ll look back and wonder why we didn’t jump in and buy. Here’s another thing: the most violent down days are often in close proximity to the most amazing up days. You must be there when those amazing up days happen. Don’t think you can time this, or “wait until things look better.” The train will be gone and you’ll be left standing at the station.
5. How long will it take the market to get back to where it was?
Balanced, globally diversified portfolios typically recover their bear market loses in 2-3 years. That’s why we encourage all clients, regardless of age, to have a three-year Reserve cushion outside of the stock market. The Reserve can be tapped for any purpose while the rest of the portfolio heals itself.
6. How can I protect myself from something like this in the future?
A key part of your financial plan is to hew to an asset allocation that balances the occasional terror of price volatility with the regret for not realizing your life goals. Price volatility is temporary, short-term, and reversible. Legendary fund manager Peter Lynch said, “The secret to successful investing in stocks is not to get scared out of them.” Your real risk is about whether or not you achieve your goals.
7. I hear about “staying the course” but I’m afraid of losing more. What should I do?
“Staying the course” means to stick with your plan unless there’s a compelling reason to change it. A market drop is not a compelling reason.
“Staying the course” is what a pilot does to get you to your destination. But “staying the course” does not mean to do nothing. Pilots continuously make adjustments for weather, traffic, and other conditions. “Staying the course” is about doing what must be done to get to the destination.
8. What should I do with my workplace savings plan (401k, 403b, 457)?
Increase your contributions to the allowable maximum! Put those contributions into the most aggressive mix possible of US and International equities! Contact us for suggestions about your specific plan.
9. I recently inherited some money and want to invest it. Should I make a lump sum investment or spread it out over time?
The research on this points to a lump sum investment except in one condition: A market downturn! In that situation, like we have now, dollar-cost-averaging over several years is likely to be more advantageous. Let’s talk before you do something.
10. Will this market drop impact my retirement plan?
It depends on your target retirement date. If that date is more than five years out, a market drop probably won’t be impactful. In fact, it may be to your advantage. If your retirement date is less than five years away, the plan deserves a look. This is one reason why regular plan reviews are so important.
11. How will this market drop affect my retirement lifestyle now?
It shouldn’t because now is when to tap the Reserve. Do that, let the rest of the portfolio heal itself, and get on with your life.
12. What if there’s a recession?
Contingency planning for income interruption is an essential part of the plan process. That planning is best done during good times. It’s quite risky to wait until an actual recession or job loss occurs because your options might suddenly be limited.
Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Dir of Research, San Jose, CA jimcos42@gmail.com 408-674-6315
DISCLAIMER: This article is for information and educational purposes only. It does not constitute an offer or recommendation to buy or sell any securities, nor is it a solicitation for an advisory relationship. Investments can lose money. Do your due diligence, read the prospectus, and consult trusted advisors.
© Cosgrove Fiduciary Advisors, LLC
