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I remember getting calls from potential clients asking me to help them after they moved all their money out of equities in response to a major market downturn – particularly during the 2007-2009 recession caused by the mortgage crisis.
I would tell them that I wish they had called me before taking such a drastic step as I could have helped them modify their asset allocation rather than get out of the market entirely.
Everyone has a great risk tolerance when the market is hot. But you need to consider that markets fluctuate and have an asset allocation that you can live with during times when markets are down.
Even the most famous economists don’t know for sure what the markets will do. Market timing doesn’t work.
Perhaps some people are finding out now that they need to de-risk a bit. People who have recently retired or are about to retire need to consider sequence of return risk as big losses during this period can have a serious long term impact on their investments.
The value of guaranteed income in retirement can’t be overstated. That’s why I’m a big fan of delaying Social Security for at least the higher earning spouse unless both spouses have short life expectancies or there are other unique circumstances. It’s the best annuity money can buy and offers inflation protection without any market risk.
As for possible cuts in Social Security benefits down the road due to underfunding, I find it hard to imagine people who are already collecting benefits being affected as it would be political suicide.
Everything has some risk. Annuities have carrier risk and some also have market risk.
I suggest getting professional advice if you need assistance. It’s worth the money!
Francine Duke
“As for possible cuts in Social Security benefits down the road due to underfunding, I find it hard to imagine people who are already collecting benefits being affected as it would be political suicide.”
I wish I could be so sure. Just in the past decade we’ve seen changes to long-standing policy. Here’s a pair. The limit for property tax deduction dropped to $10K. Prior to 2020 designated beneficiaries that inherited IRAs could withdraw the funds over the course of their lifetime, now only spouses can. So it isn’t beyond belief Social Security benefits could be reduced or taxed.
I tend to agree with Fran, but I wouldn’t wager money on it. We live in screwy times.
I heartily agree with the value of both guaranteed income and professional advice in retirement. For guaranteed income between us my wife and I have delayed SS, delayed pensions, deferred compensation invested in low risk funds, deferred annuities and TIPs bond ladders. We also have a financial planner specializing in retirement advice with a conservative approach who has been very helpful with comprehensive planning and peace of mind.
I agree Rob with Dlaying SS for the greatest payout.
For me, as long as the health is good and I am doing health oriented actions, I am enjoying my monthly deposit. Every COLA is also as high as I could get.
I took the idea of not thinking about getting back all of my over 50 years of contributions.
I rather am living a life of financial ease for what years I have left.
I framed my “You won’t get a higher amount, so apply now” letter from the SS folk.
I also found two retirement plans that came with a job and in the last one, I also maxed out as it was set up to be flexible as to how the individual managed his work life.
Time on the job, and earnings were the detriments so I worked until 70, did all the overtime and holidays possible.
That and other actions on my part means I’m doing OK indeed.
Delayed gratification works well!
Christine Benz wrote an interesting article yesterday. I’m going to attach a link to it. Hope it works.
https://www.morningstar.com/personal-finance/maybe-you-should-sell-some-stocks?utm_medium=referral&utm_campaign=linkshare&utm_source=link
Benz makes the useful distinction of risk capacity versus risk tolerance. I prefer periodic review and rebalancing rather than reacting to market gyrations. However, a severe downturn might be a good time to consider a Roth conversion.
That distinction was my favorite part of the article. And, I agree with the rest of your comments.
Thank you all for the nice responses and good conversation.
I know there are a lot of do it yourself investors here, but having a good advisor to help talk you off the ledge can be worthwhile. Great post Francine.
Rebalancing helps keep your plan in motion when the market is tanking. Don’t forget to rebalance(in tax deferred if possible) and tax loss harvest in your taxable account.
Luckily the market has rebalanced my retirement portfolio for me already 😂
Ha! I was thinking the same thing. If it keeps going not only will I have “been rebalanced” but will also be at that more conservative allocation I’ve been thinking about for some months but never acted on.
With an eye on the wash sale rules…
Well said, Francine. I’ve traditionally kept probably too much in cash, and that’s been even easier to do during the last couple of high interest rate years. But I will say it’s been a comfort during this “tariff crash”.
There’s real value in getting a good night’s sleep.
I’ve been asked “What’s your sleep number?” Since 2000 having an appropriate cash stash has afforded me several things (1) less concern about market downturns and (2) provided some dry powder to buy when I am inclined to do so, beyond my regular DCAs. Now retired there is that third benefit (3) which is no need to sell to make annual RMD withdrawals.
It’s hard to know what your true risk tolerance is — until you find yourself in the middle of a stock-market decline. Now is a great time to ask yourself, am I taking more risk than I’m comfortable with? A little discomfort is okay, and I wouldn’t suggest anybody sell now, unless they fear they’ll panic if the market drops further or they need spending money from a portfolio that’s largely or entirely in stocks.
Yes, Jonathan. The matter of one’s risk tolerance has moved from a theoretical matter – to a very practical matter – over the course of just a few days.
These market crashes eventually provide great investment opportunities—Warren Buffett has stored up several hundred billion that will give him tremendous leverage in upcoming bailout deals. I just hope the rest of us can recognize the market bottom and can take advantage of re-investing/rebalancing once the sellers stop selling, the blood is in the streets and those W drops seem to indicate recovery. Any help with that Jonathan?
https://www.aaii.com/sentimentsurvey
I have been through many corrections/recessions and can honestly state that I have never been able to recognize the bottom.
+1.
Trying to recognize either the market bottom or top is the definition of ‘market timing’.
DCA all the way down, same as way up.
For sure Mike. As I said in a different post, we are in the middle of transferring funds and a huge chunk of our money has been in cash since last Monday. My plan is to dollar cost average back into the market over the next 9 months. I’ve no clue if this is optimal, but I don’t want to miss out on an eventual recovery.
Nor will I be trying to recognize it this time.
I don’t agree—if we go into a recession, there will be a bottom and you can do quite well. If selling volumes drop, pessimism reigns and there are huge contractions, there are opportunities. Vanguard’s large cap value fund VVIAX has dropped from 80 in the past two recessions to 20. That is an actionable bottom. If you miss and get in at 20 and 25 and 30, it is all good. Nvidia at $5/share in 2008 was a bottom. Transocean (RIG), of course went from 140 to 70 in the Great Recession and is now a stable $2 a share!
I suppose that’s one way, and best of luck to you. As for me, if stocks go down enough that my allocation is out of whack, I’ll consider buying more stocks. I don’t care if that point is or isn’t the bottom.