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Is it time to rethink your retirement plan?

The pandemic has wreaked havoc on our lives. Most of us have been staying at home since March. We’ve transitioned our ‘in real life’ relationships to online visits. We’re working from home, playing at home, and doing what’s necessary to stay safe. We’ve watched unemployment rise, economic activity contract, and the stock market react with wild swings in both directions. But for those of you within five or ten years of retirement, the current situation begs the question: Is it time to rethink your retirement plan?

If that burning question is keeping you up at night, I have some very good news: 

As long as you’re working with an experienced, ‘real’ financial advisor, your living, breathing retirement plan has you covered.

How? A well-crafted retirement plan considers factors that impact your financial future. These factors include your current asset levels, how you spend and save, and how many years you have until retirement, as well as nearly 100 years of market history and economic data. Keep in mind that that long history includes every bull market, including the recent 11-year run, and every bear market, including the 2008-2009 financial crisis, the tech bubble, the savings and loan debacle, inflation periods, and, yes, even the Great Depression. Today’s pandemic may be unique, but how it impacts your retirement plan over the long term is not. The market has ‘been there, done that’—over and over again—and historical volatility, standard deviations, and correlations have been factored into your plan. 

But that’s not the way it feels, right? 

I get it. Just like you, my reptilian brain tries to take over when I’m facing a new and scary situation. That lizard brain seems to delight in causing us to react irrationally and make poor decisions—especially about money. When dramatic things happen in the market like the COVID-driven global shutdown, I feel exactly what my clients are feeling. However, I’ve trained myself not to react to the headlines and not to act on those feelings. I take a deep breath, look at the facts, and focus on making sound, rational decisions. Even for me, it’s rarely easy. For investors who aren’t trained in the nuts and bolts of investing, it can be even harder. 

One of the biggest challenges is something called the ‘recency effect.’ The recency effect likes to play with our minds by getting us to place greater importance on what we’ve experienced in the immediate past (such as that oh-so-comfortable 11-year bull market) and neglect to consider how things have played out in the less immediate past. To help my clients combat this effect, I rely on two powerful software programs, Monte Carlo and Riskalyze, to explain investment outcomes using real, long-term market data. Using these sophisticated tools, I can say, “If you invest this amount of assets in this way, here’s what the outcome will look like in 1000 different scenarios.” We can see what circumstances would cause a plan to fail and what would cause it to exceed our wildest hopes. We can then take the average of the two to find a likely outcome based not on emotions, but on realistic market expectations.  

The goal of the exercise isn’t to give us all the answers. (Even Warren Buffett can’t know tomorrow’s reality until he’s smack in the middle of it!) The goal is to encourage rationality—even when our reptilian brain takes over after months of watching our hard-earned nest eggs drop in value. Perspective and experience help us rise above the noise. Here are a few facts to help you stay in that rational state of mind:

  • No one can predict what will happen next.
    The most recent bull market came to an abrupt end in March when the shutdown of global business began to have an immediate and strong impact on corporate revenues, valuations, and stock prices. While there are many predictions about how deep the recession will be and how long the recovery will take, no one knows what the impact on earnings and growth will be in the next year or so. We trust that once the virus is controllable, we will be poised for recovery. Expect some industries to fail, some to be completely transformed, and others to be born from the ashes.
  • The market balances out—eventually. 
    The market tends to overshoot decline and overshoot recovery, so it’s no great surprise that the numbers have been particularly volatile during this crisis. Investors are human; we tend to panic when facing the unknown (say hello to that reptilian brain!), and to be hopeful with each piece of good news. At the same time, the economy and the price of stocks has diverged for some time, with stocks performing far better than expected under the circumstances. Does this mean the market is overvalued? Not exactly. The short-term rise in prices is, at least in part, due to the fact that the Fed has added liquidity to the financial system, and investors who are flush with cash are driving up the price of stocks. By the middle of 2021, I expect to see companies beginning to stabilize and the market balancing out as the economy starts to operate at capacity once again. Ultimately, market prices will reflect economic fundamentals, which means that long-term investors who are planning to fund 30+ years of retirement can safely (and wisely!) ignore the daily market news.
  • Equities remain the wisest place to earn a return.
     
    If your assets are ‘invested’ in cash, they’re not invested. In today’s low/zero rate environment, after inflation, cash actually delivers negative returns. Investors, by definition, seek to participate in the growth of the economy knowing that achieving a return on investment requires some measure of risk. They also know that capitalism relies on earnings growth, dividends, and productivity. Long-term investors can take comfort in the fact that the majority of publicly traded companies are well capitalized and likely to survive the disruption. And if all that wonky economic jargon doesn’t assure you that equities are your wisest long-term investment, then remember this: the S&P 500 index has returned a historic annualized average return of around 10% since its inception through 2019, including every market ‘crash’ and every bull run. That’s a whole lot better than 0% no matter how you look at it.  

So is it time to rethink your retirement plan? Maybe. Every living, breathing plan needs maintenance to stay well, and changes may be needed to ensure you’re invested properly for the current environment. As you face the next phase of the current crisis, do what you can to fight your reptilian instincts, stay rational, and make fact-based financial decisions. When considering changes to your plan, ask yourself, “Is this is what a prudent investor would do?” and let your rational brain lead the way. And if you need guidance to help make the best possible decisions, please reach out. As always, I am here to help!