Although the stock market has recovered most of the losses it sustained in the first quarter, the coronavirus-related fear that originally sent investors running for the exits seems to be lingering for some. This week, the Wall Street Journal reported on some investors who say they can’t afford to risk more losses as they approach, or live in, retirement.
According to the article, “For the most part, financial planners and advisers recommend that individuals who are approaching retirement gradually reduce their exposure to riskier assets, like stocks, while increasing exposure to more conservative investments, like government bonds. What they don’t typically recommend is pulling out of the stock market altogether.”
You can count me among the advisers with this mindset. That’s because when you exit the market and move your assets to cash, you have, in essence, already guaranteed yourself a lower expected return.
As the WSJ article points out, timing the market is difficult. To be successful, you must be correct twice: first, in knowing when markets will decline, and second, in knowing when they will rise again. Unfortunately, I have yet to see a crystal ball that can predict this accurately.
In my opinion, stock prices reflect all available information. While new information can affect a stock price, investors don’t have a reliable way of knowing what that information will be. And since they can’t predict the news, they also can’t predict how the market might react, making it highly unlikely that anyone can time the market successfully.
Approaching retirement (or living in retirement) can make investment risk seem terrifying. That’s why it’s important to discuss your tolerance for risk with your financial adviser. While there’s no reason to take on more risk than you need to, some risk can help you benefit when market performance is positive. Placing your money in safe-harbor investments, such as CDs or bonds, may keep you from losing money, but it also keeps you from building additional wealth in any meaningful way. History shows that market advances are more frequent, last longer, and have greater magnitude than market declines. Are you sure you want to miss out on those opportunities?
How to Stay Confident When You Can’t Predict the Future
If you’re like most Americans, the uncertainty and scary headlines from the past few months have probably put some questions in your mind. In our practice, the questions we’ve heard include:
- Could my portfolio go to zero?
- What happens if the markets decline more?
- Will I outlast my money?
- Can I still retire on time?
- What should I do?
Here are three simple strategies that you can apply to create a plan for the future — even when you may not know what the future holds.
- Find a strategy that makes you comfortable, no matter how the market is performing. Whether your goal is saving for retirement, putting kids through college, or saving to buy a home, commit it to paper and decide on a strategy to get there. As you develop your strategy, be sure to examine the range and likelihood of possible outcomes, such as a long-term bull market, a recession, etc. Your plan should recognize that there will be ups and downs along the way toward, but it should be a strategy you can live with — one that will get you through the difficult times so you can take advantage of the good times.
- Focus on what you can control. Without that proverbial crystal ball, no one can control the stock and bond markets. But that doesn’t mean you can’t benefit. The unpredictability of the markets is one reason why investors can reap substantial rewards. After all, if you always knew how the markets would perform, why would investors earn any kind of a return?
Although you can’t control the markets, you can control your risk level, how much you save, and your point of view. If you’ve found your strategy for the long run (as outlined in step 1), it should be easy to switch your focus to the things you can do to help yourself. That’s far less stressful than checking your portfolio balance every day!
- Let the quality of your decisions be your guide. When you focus on making deliberate choices based on evidence, you’re likely to be more successful and less fearful than letting your emotions dictate your decisions. When markets take a nosedive, it’s common for people to want to take action — any action — right away. But remember: Doing nothing is also a strategy. Better to take the time, examine the facts, and make the best, most logical decision you can with the information you have. That way, even if your decision doesn’t result in success, you can still feel confident about the process you followed to reach it.
Fear is a Bad Adviser
People are emotional animals, and many of us rely on our emotions to help us make decisions. But as this article from Psychology Today suggests, acknowledging those emotions, and recognizing how they might distort your thinking, can help lead to more balanced decision-making. At AMDG Financial, we encourage our clients to contact us when market volatility and negative news headlines make them feel overwhelmed and fearful. As interpretive financial advisers, we act as your accountability partner, by talking through all of your options and guiding you to the solution that serves your best interests.
While I don’t have a crystal ball, I can confidently predict that the markets will continue to experience highs and lows over time. How we respond to those highs and lows will make all the difference in ensuring a successful investing experience.