By now, I’m sure you’ve heard over and over again about how the markets have had a terrible month. We have been teetering around correction status for the last few weeks. Is it a momentary blip on the radar or are we heading for a bear market? If you are working with an advisor that is doing proper financial planning then you should not worry. Financial planning with a trusted advisor should start with making sure that your portfolio has the proper amount of risk exposure to meet your financial goals but shouldn’t exceed it to chase excess return. The success of your long-term financial plan should not be drastically affected by a 10% drop in the market. The fact is, we historically see a correction in the market every 18 months. We have been spoiled as investors with excess returns for the past four years, but corrections are to be expected and are a part of investing that is not going away. Your advisor should be able to demonstrate the potential impact a bear market would have on you reaching your financial goals. The average bear market lasts 14 months. If your goals are jeopardized by 14 months of poor performance, you should reevaluate the amount of risk you are taking. Below I have outlined how 3 different generations should view the recent month in the stock market.
Try to get used to it. Many of you have not yet experienced a month in the markets like this last one. It happens. There is no need to hit the panic button. Stick to your long-term investment philosophy. Investors often make rash emotional decisions in times like these that negatively impact their portfolios in the long run. In fact, many do-it-yourself platforms, such as TD Ameritrade and Scottrade, had platform crashes due to investors having a “panic selloff”. Conclusive data shows that individual investors underperform the markets by 1.5% annually due to trying to time the market (in other words, it doesn’t pay to be a “lemming”). If you are a millennial investor, you need to realize that these types of downturns will happen many times in your lifetime and that you have plenty of time to recover. A downturn can also present a good opportunity to rebalance your portfolio back to your original investment policy so that you are buying low and selling high (be an anti-lemming). If you have a properly allocated portfolio based on your goals and risk tolerance, you should stick with it long-term.
Source: Goldman Sachs Asset Management.
Gen X’ers are closer to retirement than millennials, but should also not be hasty to sell off during a downturn. Your risk exposure should be less than when you were younger and just getting started as an investor. You will feel a dip in your portfolio value, but you also have a long enough investing time horizon that you should not panic. Pulling out of the market when your portfolio is losing value may cause you to miss out on the eventual upswing that aids your recovery. We have already seen how market timing can hurt your portfolio, but you may be surprised to see how markets have reacted following some of the roughest times on record.
Even after some of these tough time spans for investors, if you would have ignored the noise in the media and stayed the course, you would have enjoyed robust recoveries.
If you are a baby boomer closing in on retirement or are currently retired, you are not immune to market volatility. I recently read an article from TIAA-CREF that cited that less than 40% of people entering retirement have a retirement income plan in place. This is extremely startling. However, if you do have a financial plan in place that includes a retirement income strategy, your financial goals’ exposure to market downturns should be minimal. One way we work with our clients at Integrity Wealth Advisors is to establish a time-segmented retirement income strategy. This ensures that capital that is pre-determined to fund your first 1-5 years of retirement and is being used to fund the gaps from other revenue streams (i.e. pensions or social security) is coming from asset classes that are usually stable when equities are feeling downward pressure. In doing so, the later time-segments can stay invested and focus on growth while your short-term income needs should not be jeopardized. Thus, a correction in the market has a more minimal impact on you reaching your long-term financial goals.
Corrections in the markets HAPPEN. Consider working with a financial advisor to help you identify an investment policy that is right for you, one that is aligned with your financial goals. An advisor can help you to avoid many of the behavioral investing mistakes mentioned above, while keeping those goals in mind with a comprehensive financial plan.