Jeff’s Weekly Stock Market Commentary: Retirement
Those 5-10 years or more from retirement have time and money on their side.
For those who are retired or near retirement, the number one priority must be to avoid significant losses. Many investors experienced losses of 30-60% in the crash of 2000-2003 and then again in the crash of 2007-2009. Depending on their age at the time, those who were still working and contributing to their 401k’s recovered over the ensuing years.
Keep in mind, though, that much of that recovery occurred because they continued to put more money in on a monthly basis. Their monthly contributions over the years 2000-2002 and/or 2007-2009 went into a market that had retreated by almost 50% from the highs. As the markets resumed their uptrend their accounts gained ground quickly.
That taught some investors that they will be fine as long as they hang in there because the markets will eventually recover and all will be fine. That may be true for those that are still 5-10 years or more away from retirement. They are probably at the highest salary level of their careers and are able to contribute a higher percentage of their income to their retirement nest egg. They have time and their income on their side.
Those who are retired don’t, so they must focus on avoided significant losses.
The situation, though, for those that are retired or within a year or two of retirement is very different. They aren’t in a position to continue putting money from wages into their retirement fund for another 5 or 10 years. Instead, most of them have stopped contributions and are instead taking distributions.
The risk of financial harm is much, much greater for them and it is likely that they won’t ever recover from a loss of 20%, 30% or 40%. In fact, if they take distributions of 5-7% a year to fund their lifestyle, it is virtually impossible to recover from even a 20% loss (which is considered a ‘normal’ correction). Retirees who fail to recognize these risks may be forced to go back to work or drastically reduce their standard of living.
The strategies, processes and approach used must be different for retirees.
Since most of my clients are retired or very near retirement, I approach account management from the perspective of avoiding losses of 15-20% or more. The strategies, systems and processes that I use are designed with that in mind. And I manage the amounts allocation among stocks, bonds and cash from that perspective. In order to do so, it requires me to constantly assess the relative risks between those asset classes to determine the relative risk and reward.
The last several months I have been decreasing my allocation to both stocks and bonds and increasing cash. I have the lowest allocation to stocks since the crash in 2008. Actually, my only equity positions currently are short stocks and those are small positions. The bulk of the portfolios are in US Treasury bond ETFs and are spread across short, medium and long-term bonds.
Sure, that means that we are missing this ‘recovery’ in stocks the last several weeks, but it also means that we missed the big drop in stocks that happened on and around August 24th. For instance, the highs in the main US stock indexes occurred in June and the decline started in earnest in the latter half of July. The trend indicator that I use signaled a downtrend in US stocks on July 2nd, 2015 and has remained in the downtrend status since then.
The economic indicators and global macro research (what is happening around the world) has also indicated that growth is slowing. When growth slows, it is harder for companies to continue to grow their revenues and their profits. That decline actually started in the 2nd quarter reporting period where revenues for the S&P 500 were down -2.1%. That trend seems to be continuing and accelerating in this quarterly earnings cycle. So far, 15% of the S&P 500 companies have reported and average revenues are down -4% and earnings are down -9.3%.
Is now the time to shift more money back into stocks?
The best time to buy stocks is when the overall economy is growing, because it is easier for companies to grow, too. And it is even better time to invest in stocks after a significant pullback of 20% or more that may happen once or so a decade. The last time that happened was in 2008. I believe that we are in the beginning of the end of this bull market type cycle. And in order to be able to take advantage of investing at the lows, you first have to move out of stocks before they start to crash. That may mean that you miss a further upside while you wait, but for my retired clients who recognize the priority of protecting their nest egg, they place a higher priority on avoiding the waterfall events like the one that occurred around August 20th.
If growth, globally and here in the U.S. continues to slow, it is likely that more waterfall events will occur over the next few months. If you are retired or near-retirement and are still heavily invested in stocks, I recommend using this current recovery in stocks to decrease your exposure—significantly.
For Common Sense Advisors, I’m Jeff Voudrie. Have a wonderful and Blessed week…
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