This year’s financial markets have been brutal, with nearly every asset class posting double-digit declines. For the young investor, they provide a reality check that what goes up indeed can, and must, at some point go down. For the optimistic, they might consider this a giant sale with deep discounts. It’s a different story for those close to, at, or already in retirement. Their buying days are mostly in the past. The movie is certainly not a comedy. It’s not even a drama, but pure horror. Yet if one has a proper plan, they comfortably watch the film to the end, knowing that they will be okay.
The first thing to understand that the recent decline, although steep, quick, and volatile, is not without precedent. In the 63 years since World War II, there have been 13 market declines of 20 percent or more, the official definition of a bear market. (“The Four Essential Characteristics of All Bear Markets, Nick Murray Interactive, Vol 8, Issue 10, October 2008.) Many can recall the malaise of the early 1970s. We can all recall the horror of 9/11, the technology bubble bursting and the last round of corporate scandals that nearly cut the broad U.S. stock market marked by the S&P 500 by half. In every case in the past, the decline proved temporary, the increase proved sustainable and those that stayed broadly invested in diversified portfolios were rewarded.
We must also recall why people are invested in publicly traded securities, and equities. The challenge of retirement is generating an income that maintains one’s standard of living. The good news is that Americans are living longer. A married couple retiring at 65 has a better than even chance that one person will be alive at 88. (Society of Actuaries, 2000 Male and Female Mortality Tables) That 88 year-old person will need income. That income will need to have doubled since the day they retired just to keep up with a modest inflation rate of 3 percent.
That’s the bad news. Living is indeed expensive. Most corporate pensions do not adjust for inflation. Social Security does, but then the inflation is often the Medicare payment that is removed from the check. One of the best bulwarks against the relentless increase in prices is owning common stock of the companies that sell the stuff that is increasing in price.
If one puts equity investing in the proper perspective of an overall plan for retirement, they will be okay if this or some other decline coincides with their desired retirement date. The reason is that such a plan would have contingencies built in, such as two to five years of expenses that are required from investments to be in cash or near cash investments. That is, if $500 a month is needed from investments, a person may have as much as $30,000 in a safe cash account. Other components include products, often from insurance companies, that can provide for guarantees on income streams and sometimes principal. Guarantees always come with restrictions, fees, and charges. Yet just as a car payment gets one a car, a fee for a guarantee is a great value in the right situation.
A properly diversified income plan is flexible enough to not have to sell too much, too quickly in a down market. It can help provide for an umbrella in the rain, a storm cellar when the weather gets particularly mean but also the gear to enjoy the sunshine when the environment improves. Most important, having a plan allows one to actually read the days financial news and say to themselves and their loved ones, we’ll be okay. We planned for this.