Stick to the Plan

Wednesday, August 8th

You might have noticed a little nervous energy coming from Wall Street recently.  The articles predicting a looming market correction and an ensuing selloff have started appearing fast and furiously all over the media.  Many of these articles cite the fact that we are getting close to setting records for the longest bull market in history while also experiencing one of the longest periods of economic growth we’ve ever had.

But the fact of the matter is that regardless of what the headlines predict, the key to protecting your retirement money and your peace of mind is to stick to your plan, avoid knee-jerk, emotional decisions, and prepare for contingencies by diversifying.

Damon and I recently had the opportunity to travel to New York and attend some training by Robert Shiller and Roger Ibbotson, both highly renowned economists, with a wealth of knowledge based on extensive market research.  There were some key takeaways that apply to everyone preparing for and living in retirement:

1. Human beings are emotional and this impacts our investment decisions – Ibbotson and Shiller have spent years studying behavioral finance – the study of identifying and understanding why people make certain financial choices.   As much as we like to believe we are highly sophisticated, intelligent, rational creatures, we are often at the mercy of our emotions.  This is especially true when it comes to our thoughts and decisions about money.

While we do have a highly evolved, decision-making, pre-frontal cortex, it is a natural reaction to allow FEAR to drive our decisions.  Whether it’s the reckless fear of “missing out” on an extraordinary opportunity or the paralyzing fear that “keeps us on the sidelines,” far too many people make poor decisions regarding their finances due to emotions.  As Ibbotson noted, “Fear and greed prevent us from doing what we should.  We know that we should have less risk, but we don’t want to miss out on potential gains.  As a result, most people don’t do anything.”

Shiller pointed out that as human beings we overemphasize the negative—if we are in the market, we fear missing out on greater returns; and if we have never dipped our toe in the market, we fear investing at exactly the wrong time.  Simply put, fear causes problems as we manage our portfolios and retirement accounts.

2. Preparing for today’s retirement includes lowering risk and balancing your portfolio – As you know, in today’s world there is much more onus on the individual to prepare for retirement.

One of the most important steps to take in that preparation is not only to save, but to protect that savings by lowering your risk, especially as you approach retirement.  Shiller observed that because we have been in a bull market since 2009, many people have become complacent, just riding the wave, while not giving enough thought to balancing their portfolio and lowering their risk.  Others, who have reduced their risk at a time when a robustly growing market seems anything but risky, are tempted to abandon their diversified strategy and make their portfolio more aggressive.

Reducing risk is critical because a down market (which can happen any time) can be devastating during retirement.  Keep in mind that unbalanced, equity-driven portfolios can be irreversibly decimated when withdrawals coincide with market downturns, especially in the initial years of retirement.  Ibbotson advised, “While you are working, your salary acts like a bond portfolio, providing you a stream of consistent income.  When you retire, you need to lower your risk using bonds or fixed-indexed annuities.”

Bonds have traditionally been a good, low-risk vehicle for investing.  The problem with bonds currently is that they are over-valued.  Their returns are at historical lows right now, which means that as interest rates rise and bonds continue to lose value, it creates a capital loss.  Referencing the current situation, Ibbotson concluded, “Investors must find better ways to lower their risk” and suggests using fixed-indexed annuities as a strategy to provide consistent income and lowering the overall risk of a portfolio.

Whenever it comes to your hard-earned money and your precious retirement nest egg, it’s natural to feel a little fear about the ups and downs of the market.  Whether those fears are urging you to “get while the gettin’s good” or “take your money and run,” as your financial advisors, we have the advantage of emotional distance and can provide a balanced perspective on the right amounts of risk in your portfolio.  We can help you create a diversified, balanced plan that will allow you to access and enjoy your money all the years that you need it.

As you think about your current retirement plan, be sure to make room for vehicles with less risk and evaluate how balanced your portfolio really is.  Are there ways to reduce your risk and still get the growth or income streams you want?  We know there are.  And we are absolutely committed to find the solutions and create a plan that will help you meet your personal goals and achieve your retirement dreams.

 

Matt Deaton