In March, the S&P 500 had the fastest bear market in history, falling 20% in 16 days, and then hitting a 30% decline over 19 days.
The following month, the S&P 500 also had one of its best weeks in history.
This type of volatility is more normal than you realize.
We had three years in a row of double-digit losses in the tech bubble of 2000, 2001, and 2002. That hadn’t happened since 1939, 1940, and 1941. A few years later came the Great Recession with a near financial system meltdown, and now in 2020 we have a global pandemic. We have had three market collapses within 20 years that have nothing to do with normal market cycles. There will be a fourth sometime in the future.
Today, we are likely in the midst of a serious recession with the risk of unemployment possibly approaching near Great Depression levels. These circumstances apply great pressure on investments, which creates incredible opportunity if you implement a sober and time-tested strategy.
So, what do you do with your investments, if anything?
The advice from the industry typically is to ride it out. Don’t sweat the short term because you are investing for long run, and the market always come back. This may be fine for young investors, but I want to speak to retirees and those close to retirement. If you are taking withdrawals in a down market, you could run out of money, which is called “sequence of returns risk.”
You should be aware of this scenario and know that some money managers specialize in reducing risk in market downturns. Their goal is to avoid major losses, so your account doesn’t ride to the bottom. They will then reinvest when conditions warrant so your account can grow again. This is what most people want, but everyone is told this can’t be done. Wrong. It’s true it can’t be done perfectly all the time, but if you combine different managers like these, (all of whom may work differently), you will very likely avoid severe losses. A combination of money managers who specialize in risk control can be done in one account, so you have one statement. It’s easy to do. As Warren Buffet has said, “The secret to making money is not losing money.”
Know the math of gains and losses. A loss of 30% needs a gain of about 43% to recover. A loss of 40% needs a gain of 66.7%. If you are taking withdrawals, the numbers get much worse. There is retirement income software that illustrates this. This is an important risk to educate yourself about and that a plan in collaboration with a licensed money manager can help remedy.
And the $64 million question – Can you get a guaranteed source of income during the downturn?
Yes – through the A-Word. I am talking annuities. You may have heard negative things about annuities, but common sense should tell you to avoid one-size-fits-all advice. Did you know an annuity is probably the best way to get long term care insurance and is the ONLY way to postpone required minimum distributions from retirement accounts to as late as age 85, (that’s a nice little tax break there). And, annuities are part of the newly passed SECURE Act, which will lead to the availability of annuities in 401k plans so future retirees can “pensionize” a portion of their retirement. These are tools most retirees should know about.
An annuity guarantees a lifetime income, can guarantee growth for income, and can guarantee a death benefit. If you have a base of guaranteed income, you may barely care about the market wildness on your stock accounts, and you probably CAN wait it out, because you don’t totally depend on the stock market for your income. You likely shouldn’t totally depend on the stock market anyway. That’s why people panic. You should have stable income you don’t have to worry about if the market tanks more and when it tanks again, because it will.
Lastly, plan for other risks: the death of a spouse will mean the loss of a Social Security check and possibly a pension. You could have huge medical expenses including long term care expenses. Have you thought about your longevity? Will you run out of money if you live a long life? I can let you know how to tackle all of these in my next columns. Stay tuned.
With nearly 30 years of experience, David Treece works as a fee-based investment advisor representative with a duty to act in a fiduciary capacity.
While always putting his client’s interests first, David derives his planning strategy at Treece Financial Group in part by applying the lessons learned from past market uncertainty and built-in market volatility. Rather than “wait” the market out, David works with clients to evaluate alternative, adaptive strategies that reduce risk and achieve their financial goals.