3 Steps Retired Investors Must Do Right Now
The S&P 500 hit an all-time high in May of 2015 at 2130. It has been downhill since then with a free-fall in the index during the middle of August where it slid to 1867. Many investors were shocked at the 12% plunge but were relieved that the markets recovered over the next two months—or did they? On January 20th, 2016 the S&P 500 was back down to 1860 and it is becoming obvious to even the most bullish investors that we may not recover for quite a while.
The S&P 500 isn’t the only stock market index that investors should pay attention to because it represents only a small part of the overall market and most brokerage firms and advisors have their clients invested in both big and small companies. The Russell 2000 represents the bulk of the stocks that are traded in the United States and it includes many medium and small companies that aren’t a part of the S&P 500, the NASDAQ or the Dow Jones Industrial Average.
The Russell 2000 set a high on June 23rd at 1295. Just a few weeks ago it was at 965 for a collapse of 26% from its all-time high. In other words, you’re lucky if you were just invested in the S&P 500 but most investors also had exposure to small and mid-cap stocks so their losses could be anywhere from 15-20%.
Moreover, I believe it is likely that the markets still have further to fall!
So what should you do if you are still heavily invested in equities (the stock market) and are sitting on significant losses? I have been a money manager for close to 20 years and I want to share the 3 steps retired investors must do right now to stop the bleeding, understand what went wrong and how to get back on track.
Step 1: Immediately review the status of your accounts and take steps to avoid further damage.
It isn’t prudent to ignore what is going on in the markets and hope that they will recover. Hope is not a very good investment strategy and your inaction can quickly turn a 15% loss into a 25-30% or more disaster that you may never recover from. So the first step is to take an inventory of what you own and how much you have lost. Go back through your monthly account statements (including company retirement accounts like 401(k)’s and 403(b)’s) and get your total portfolio value by month going back to April 2015. Once you have that information you will be able to more quickly determine whether or not you have had gains or losses and how much.
If you have had gains or only minimal losses (say 3-5%) since April then you are in pretty good shape. You are probably more heavily invested in cash and or bonds as opposed to stocks. That’s a good thing right now!
On the other hand, if you have seen losses in excess of 10% then you should be concerned and probably need to take a closer look at how you are invested. Most of the account statements people show me from the major brokerage houses are mainly invested in mutual funds. Most mutual funds take a buy and hold approach and prefer to ride out a storm as opposed to moving to a safe harbor. That strategy didn’t work for most investors in the crash of 2000-2003 nor in 2008. And it probably won’t work well this time either. So you then need to investigate which funds you are invested in and how they have done the last 6 months. Identify whether the funds are invested in small, medium or large companies and whether they are in U.S. markets versus foreign and emerging markets.
For investors who are at or near retirement, hanging on to your wealth has to be priority one. Most likely, there is a lot more risk in your portfolio than you expected. If that is the case, identify the positions with the most risk and move out of those positions on market rallies. You can do so incrementally over time—but it all depends on the level of risk in the portfolio versus what you are willing to lose. In this economic environment, the markets can easily fall another 10% or more in a matter of weeks. If you would like me to look over your portfolio and help you identify your risk and ways to reduce or eliminate it you can contact me at email@example.com.
Step 2: Fire your current advisor if he/she didn’t advise you to get out of equities 3-6 months ago.
If you found out that you had significant losses in step one, then you most likely are using a traditional ‘advisor’. The traditional advisors that work for all the companies you see advertised on TV don’t serve a money manager function. They are salespeople (regardless of what their business card says). They are the advisors that gather your assets and then rely on someone else to manage it because they don’t have the neither the training nor the expertise to do so.
The firms these advisors work for have a group of mutual funds that they have close ties with and so that’s where you money goes. Then they follow the buy and hold philosophy (and tell you it is the best way to invest) because it alleviates their responsibility to make any decisions.
These advisors say you ‘can’t time the market’. And that may be true from day-to-day. But the economy and markets move in cycles that play out in months and years. For instance, does it make sense to you that after 7 years of stocks markets trending up that you would still want to be heavily invested in stocks—especially when it is becoming more obvious every day that the global and U.S. economy is slowing? Does that sound like a good time to ‘just hang in there’? Not to me! Aren’t investors supposed to buy low and sell high? With markets at all-time highs back in early summer, why weren’t those ‘advisors’ telling you it was time to move money to the sidelines to protect it? How come they never seem to sell high—instead they move you out at the bottom after a disastrous loss and then say there wasn’t any way to know! Give me a break!
Step 3: Find a money manager that proactively adjusts your account based on your risk tolerance and market threats.
If your advisor is a professional money manager then you should have noticed your portfolio changing over the last 6 to 9 months with the amount allocated to equities decreasing and the amount allocated to cash and/or US Treasury bonds increasing. For instance, I moved my clients almost entirely out of equities by July of 2015…and many of them before that. We have been heavily invested in cash (money market) and U.S. Treasuries for several quarters. Accounts positioned like this have held their value (or increased in value) during the market plunges the last 6 months.
The information you gathered in step 1 will let you know if that is how you were/are positioned. If you have seen losses greater than 5% then you are probably more heavily invested in stocks than you might want to be.
In volatile markets and growing global uncertainty you need an advisor who serves as a professional money manager. I believe that we are still in the early stages of a global growth-slowing phase. And I expect that the U.S. economy will enter into a recession some time in 2016.
Most of my clients are retired or near retirement so my focus is protecting their accounts during the rough times so we can be there to pick up the bargains when our economy does eventually start to trend back up.
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