Market Upheaval, & Your Money

What you can do in your financial plan to navigate volatile and down markets.

Last week had a few rough days in the market. If you’re reading this and this is news to you—you’re doing it right. As an investment advisor, I walk a fine line between not wanting to alarm clients but needing to reassure them when pessimistic stock market news becomes unavoidable.

Emotions are running very high in our country—there is a lot weighing on our minds. A deeply divided electorate in a Presidential election year, an enormous national debt spiraling more and more out of control, geopolitical upheavals all over the globe including riots in our closest allies’ capitals. I could continue on with the list of terrors that we are told daily will doom us all.

You can only say “stay the course” so many times before people start to ask just why that makes any sense. To expound on that general philosophy, here are some reminders of why this strategy is not only superior to any other investment plan, but is the only viable strategy.

Historical Returns

Let’s focus on the S&P 500 since 1980—the standard bearer of the largest U.S. equities.

Since 1980 it has done 10-11% per year (including dividends)¹ —an impressive return that demonstrates the power of long-term investing. It’s crucial to understand that this average includes both bull and bear markets. Some years experienced much higher returns, while others experienced losses.

In the 2008 financial crisis the index experienced a 37% drop (its worst year since 1980). Investors were again reminded of the possibility of short-term losses in the stock market. It took five years for the index to recover, but even after severe downturns, markets have historically rebounded, though the timing can vary. (Other significant downturns during this period include: The dot-com bubble burst in 2000-2002 (approximately 49% drop), and the COVID-19 crash in 2020 (about 34% drop, though recovery was much quicker.))

Importance of Staying Invested

For investors who want to earn the average return, they have to remain in the market during ALL periods, including the down market. Investors who try to time the market by selling before or during downturns often miss out on the subsequent recoveries, which can be rapid and significant. If you try to avoid losses by selling, you are attempting to time the market; something that is impossible to do even for the most experienced money managers. Missing just a few of the best trading days can significantly impact long-term returns. These best days often occur close to the worst days, making timing a fool’s game.

Smart Investing: It's About Financial Planning, Not Market Timing

There are a few strategies you should implement in your financial plan to ensure a down market does not wreak havoc on your long-term financial outlook.

Prioritizing Conservative Estimates: When developing your financial plan, your average return projections should be conservative, particularly for equity-based portfolios. Using planning projections that are intentionally lower than historical market averages serves two key purposes:

• It prepares for potential periods of underwhelming market performance.

• It gives extra weight to down-market scenarios in your calculations.

By applying a more significant drag on projected returns than what's likely to occur, you will create a buffer in your financial plan which allows for more resilience in achieving your-long term goals.

An example of a conservative return projection is using a 6% rate of return on your equity portfolio instead of the historical 10-12%.

Down Market Distribution Plan for Retirees

If you're at a stage in life where you're withdrawing from your assets, it's crucial to incorporate a down market distribution plan into your overall financial strategy. This approach helps protect your long-term financial health during periods of market volatility.

Your goal with this strategy is to create a buffer of liquid assets you can use for your distributions during market downturns. Ideally you set aside enough cash to cover 2-3 years of living expenses. During a down market you draw from these cash reserves instead of selling investments at depressed prices. This strategy allows your investment portfolio time to recover without forced liquidations.

Tailor This Strategy to Your Situation

Not everyone has a portfolio large enough to set aside 2-3 years of expenses in cash. However, the principle can be adapted to various financial situations:

• Smaller Reserves: Even setting aside 6-12 months of expenses can provide significant protection.

• Partial Implementation: Apply the strategy to a portion of your withdrawals.

• Tiered Approach: Use a mix of cash and very low-risk investments for your reserve.

It is in your financial plan where you manage the impacts of a down market, NOT by making short-term changes in your portfolio.

Final Note

Best advice I can give you: don’t even look at market news, really, ever. Truly, the only reason I keep up to date with the daily and weekly events is so I can do the most important part of my job—stop clients from making the worst decision they can make in the short term, panic and change their strategy mid-way through a market downturn.

1. This is a rough figure and can vary slightly depending on the specific data source and methodology used.