WHEN STOCKS slump, experts are often quick to advise investors to sit tight or, better still, buy more. But that won’t be the right advice for everybody.
Christine Benz, Morningstar’s director of personal finance and one of my favorite financial writers, recently penned an article listing five questions to ask yourself if you’re pondering whether to reduce your stock exposure during a bear market. I figured I’d work through the five questions—and see what I could learn about my own finances.
1. How soon until you’ll begin spending? This a key question as you decide whether you need to “de-risk,” even after your portfolio has tumbled. The closer you are to drawing down from your nest egg, the less time you have to let the stock market recover.
My wife and I are both age 62. She still works fulltime and expects to continue doing so for a few years. I’m semi-retired, with a pension and some consulting income. We would like to delay starting Social Security until we’re at our full Social Security retirement age of 66 and possibly later.
We haven’t needed to touch our retirement savings yet, and don’t expect to until my wife stops working fulltime. At that juncture, we’ll have to supplement my pension with withdrawals until we turn on Social Security. The upshot: We probably have at least two years until we need to start tapping our retirement accounts.
2. How flexible is your retirement date and spending plan? The closer you are to retirement, the less flexibility you have and the lower your portfolio’s risk level ought to be. While we’ll probably both stop working in a few years, we have some options. My wife is an experienced nurse—and very employable. The current situation has been hard on her and her colleagues, and it may change her mind on how long she wants to work. I could look for additional consulting opportunities or even fulltime engineering work if necessary.
Our spending is relatively modest, with one notable exception. We have a vacation home on the New Jersey shore, and it has a new mortgage. We agree that we probably don’t want to own two houses forever. We’ve also agreed to evaluate things over the next five years and choose a less costly living situation. If we had to, we could sell one of our homes or rent out the vacation home.
3. How extreme is your asset allocation? As of Jan. 1, our portfolio was 60% stocks, 30% bonds and 10% cash. We’re globally diversified through low-cost index funds.
After leaving fulltime employment in 2017, I rolled over my 401(k) into my IRA. I used that opportunity to build a cash bucket for our retirement. I’ve kicked myself many times over the past three years for not putting the money into stocks, but I’ve resisted the temptation. Result? We have two to three years of cash available before we’d have to start selling stocks or bonds. We think our current asset allocation is generally in line with our risk tolerance.
4. How viable is your plan currently? I view this question in terms of margin of safety. Does your plan show you have enough income sources and savings to live a comfortable retirement? If you have more than enough for the rest of your life, you might reduce risk by locking in your portfolio’s current value with lower risk, lower reward assets.
Six weeks ago, I would have felt much better answering this fourth question. Still, I just completed a quarterly update of our family balance sheet. Our retirement accounts are down 13.5% since the beginning of the year. That doesn’t sound too bad in light of the market’s performance.
I’ve been using MaxiFi financial planning software. I analyzed our retirement plan using our updated account balances. I’m still comfortable with the margin of safety. On balance, our plan is still viable.
5. Can you mentally tolerate further drawdowns? This is a harder question to answer. I intentionally reduced the risk in our portfolio a few years ago to help with this. During the December 2018 correction, I stayed calm and stuck with our plan. But we’ve never suffered anything like the current situation. In my mind, the uncertainty is far greater than anything I’ve ever experienced.
Still, having a solid plan—one with a safety margin—helps a lot. It might sound trite, but it also helps to maintain some perspective and realize our family’s financial situation is far better than that of many others. We could have a happy retirement even if our income was much lower. The bottom line: I’m okay with our portfolio’s stock allocation—though less comfortable than a few months ago—and will likely stick with it. I may even move some money into stocks.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include This Too Shall Pass, Think Like a Retiree and Not Too Late. Follow Rick on Twitter @RConnor609.