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WHAT WE ARE experiencing now is an outlier to our normal risk/reward standard deviation. Some refer to it as a Black Swan event. It happens every so many years, as we all know. This latest event hit with a greater velocity and impact than any other time in our country’s history. We blinked and more than $7 trillion dollars was taken out of the markets’ value in little more than a week.
If you are reading this and you are a younger investor with five or more years to retirement, you can wait this out and keep dollar cost averaging. But what lessons are here if you think that this could happen right before, or just newly into your retirement? This risk is what we refer to as “sequence of return risk.” Translated into layman’s terms, “just God-awful bad luck and timing.”
If you are holding stocks, bonds, real estate, commodities, etc., there is no way that we know of to completely protect yourself from, at the very least, paper losses in your holdings during such an immediate and precipitous decline. You have probably heard the phrase, “all boats go lower in an outgoing tide.” It certainly seems that way.
Sometimes, there is no place to hide. But this does not mean you cannot be prepared to lessen the blow by utilizing available investment strategies. The first and most important strategy is to have a comprehensive financial/retirement plan that lays out when you will retire, how much you will be spending, how much you should be saving, and the minimal amount of risk you should accept in a well-diversified portfolio in order to achieve your stated goals.
You may have heard of the term “alpha” which, oversimplified, is attempting to get the best return for the risk taken.
There is another kind of alpha that I believe you may not have heard of before-behavior alpha -refering to the avoidance of making emotional, spur of the moment decisions due to fear. When you have a financial plan to adhere to, you can consult with your advisor and perhaps be dissuaded from turning paper losses into real losses. If you had already had a plan that could be adjusted within the new “what-if” scenarios, then any possible panic might be better dealt with in a more logical manner.
What we are hearing every day during this crisis from our retired clients is how relieved they are that they have guaranteed, lifetime income as part of their retirement planning. This income takes pressure off drawing down on a depressed portfolio of equities, and gives peace of mind that income continues, no matter what the markets may temporarily be experiencing. It is prudent to consider covering your most essential expense needs through dependable, recurring income.
In this way, the non-essential income can be tied more into portfolio balances as a percentage and adjusted as needed.
Also, there are investment instruments available that help hedge downside moves, albeit compromising a percentage of upside moves. When integrating these strategies with more traditional portfolios, the result is more peace-of-mind. Proper planning cannot be emphasized enough.
Take this current crisis as an example. With a plan, you can instantly see how your probability of success is holding up. Is it staying within the acceptable parameters or not? If not, what adjustments might be made?
Without a plan, you are just guessing, not having any idea how a drop in the market truly affects your retirement. Dealing with a crisis as we are all unfortunately doing now, is hard enough without the added stress of not knowing how it will impact a retiree’s income, and thereby, the quality of life.
This downturn in the economy can be a great learning experience for investors looking forward as they watch the unthinkable happen. The questions you could be asking yourself now might be how you could be better prepared the next time sometime like this occurs, and how to use this movement in your favor.
Right now, top priority is staying safe and keeping those we love free of this insidious virus. Things will revert to the mean again in time, and as we have said in previous articles, we hope it is not business as usual. What have we learned?
â EDITOR’S NOTE: The views depicted in this material are for information purposes only and should not be considered specific advice or recommendations for any individual. All investing involves risk, including the potential for loss. Past performance is not indicative of future results. No investment strategy can ensure a profit or protect against loss in a declining market.
JOHN J. GRANDE, CFP, TRAUDY GRANDE, CFP, JOHN S. GRANDE, CFP
p: 800/722-1258 e: email@example.com
John J., Traudy and John S. Grande, CFPs, are co-editors of the Money Matters column in
.® They are owners and principals of Grande Financial Services Inc.,
Oakhurst, NJ, (www.grandefs.com). The Grandes advise doctors across the country on a diverse
range of investment and financial matters. Readers may submit their financial questions to them
at the email listed.