A Letter to Our Retirees During This Crisis

Over the past fifty years, which spans most of our investing lifetimes, we have seen dramatic market declines. These occur about once a decade. In the 1970s, it was an oil crisis. In the 1980s, there was runaway inflation. In the 1990s, the tech bubble burst. In the 2000s, we had both 9/11 and the financial crisis of 2008. The 2010s were bookended by the European debt crisis in 2011 and market volatility in 2018. To begin the 2020s, the global markets have been shaken by the coronavirus.

Amid any crisis, the most challenging time for investors is when they are looking at steep declines in their portfolio and wondering whether prices will continue to fall. During these times, it is only natural for investors to be concerned, especially retirees who rely on their portfolios for living expenses.

We cannot know when the next downturn will occur, and when it does, whether it will be a 10% dip, a 20% correction or the larger drops like this year’s 30%+ stock market decline. Data suggests nobody else can either. What we can do is cushion the decline your portfolio experiences by holding a portion of your portfolio in high quality bonds.

We established your stock/bond allocation such that you can live through these declines because we have seen what follows when clients “go to cash” during a market downturn — they inevitably wind up worse off over the long run. Even if they manage to get out before the worst of the decline, they inevitably wait until “things are better” at which point they have typically missed out on much of the recovery. We know this to be true as it has happened time and time again.

There are two points that are very important for retirees:

1. Recognize that we are planning for decades of withdrawals in your financial plan. The ups and downs of the market would be very problematic if you had to withdraw everything now. However, most retirees plan to withdraw a little bit each year for many years. When we calculate your sustainable spending rates, we factor in that you will likely live through multiple major downturns while you are taking your withdrawals. We use academic and empirical evidence going back to the 1970s to design our portfolios, so they are appropriately diversified to withstand these kinds of downturns.

2. During the worst of these downturns, you may think midway through the crisis that you have taken on more stock market risk than you have the stomach to endure. If you are feeling so anxious that you are tempted to veer from your long-term plan, then you should reach out to us.

There are several steps you can take if you find yourself at that precipitous emotional crossroads. Here is the course of action we recommend:

1. Let us know that you are not comfortable. Reach out to us if you have found that these market drops are more than you can stomach so we can discuss an adjustment to your plan before the next market downturn. There may be some alternatives that you have not thought of that we can walk you through.

2. Retake our risk tolerance questionnaire. If you do this now, you can better understand how you feel from a risk perspective during difficult times, so you are not tempted to take on excessive risk during good times.

3. Hold tight. Stay invested in the markets for now. You have experienced that first steep drop on the roller coaster, and there will likely be a few more with smaller bumps (up and down) ahead. But stick with your allocation and make any changes once your portfolio has recovered. While there is no direct precedent for this pandemic in the lives of today’s investors, there is ample evidence of other terrifying events including, but not limited to, the global financial crisis of 2008-09, the September 11 terrorist attacks, and Black Monday 1987. The market has always recovered and gone on to new highs.

4. Talk with us about what you should change about your investments for the long term. Rather than reacting in the short term, reach out to us to discuss permanently reducing your stock exposure by 10%, 20% or even 30%. But importantly, hold off doing so until after markets and your portfolio have recovered.

5. Understand what this allocation change would mean for your retirement. A lower stock allocation usually means spending less because the expected return from a portfolio over retirement will be lower. If the allocation change would make the sustainable spending untenable, then compromise and together we will find an allocation that meets your spending needs but still limits future risk.

Over the years, we have successfully navigated a multitude of volatile markets and worked through downturns with hundreds of clients. The future is never certain but putting a plan in place for what you will do when the inevitable rough patches occur can help you achieve a successful investing experience.

Try to stay calm. This too shall pass.


The Align Wealth Management Team