Control what you can
Erratic market cycles can sometimes trigger erratic investor behavior. During times of market stress or societal challenge, history has shown repeatedly that we should resist the urge to exit the market and invest only in cash. This temptation and topic are naturally on the minds of many readers of this column during turbulent market cycles, such as we have had since mid-February of 2020.
Nobody enjoys looking at account statements when portfolio values are down — that includes financial planners, advisors, their clients and countless others. What if you are near, at, or have just recently entered retirement? Maybe the quarterly real estate or tax bill just arrived, and you must raise the cash from somewhere to make the payment. The fact is, there is never a good time for account values to decline. Unfortunately, most, or all of us have experienced negative market cycles during our lifetime — chalk it up to just human nature that we react more strongly to the negative ones than the positive. Who wouldn’t?
For some perspective, when we form a partnership with clients to create a financial plan or build an investment portfolio, we use historical performance of investment returns or projections with Monte Carlo simulation (used to model the probability of different outcomes in a process that cannot easily be predicted) as a guide for our recommendations. Since our recommendations are at least partly based on historical data, they would naturally include some challenging and negative figures from past years.
While we cannot control everything relating to our financial lives, fortunately, there are many details that we can influence. If you are near retirement in a declining market cycle, while you cannot impact the market — you can usually decide how much longer you will work. You could continue to work another year or two to offset a period of negative market performance. If you have just retired and the economy is slowing or the market is stressed, part-time employment for another year or two will help to ease the transition. This additional time on the job will enable you to earn some added income and/or enjoy employerpaid health insurance benefits. Doing so may allow you to defer collecting Social Security benefits in a welcome exchange for higher benefits in later years.
We spend a lot of time with clients, especially in the beginning of the relationship, to develop their “target” asset allocation, based on tolerance for risk. With a target allocation, our goal is to determine the right mix of stocks, bonds, and cash inside the portfolio. The target is the result of conversations and meetings with the client coupled with a determination of their goals and objectives, prior to investing any money. After initial investment, rebalancing may be necessary at times, due to market conditions and fund performance. The crucial point here is that the target allocation should be maintained throughout all market cycles – whether good, bad, or flat. This is another aspect of control that an investor has, and if market declines are extremely uncomfortable, it may be a sign that a new “target” is appropriate.
While today’s financial planning software is sophisticated in its scope, it does not know anything about family history or lifestyle. Therefore, even though in financial planning we use industry standards, such as life expectancy to age 90 — perhaps your situation is different. Living longer may be a blessing, but longevity can also present a challenge to sustainability of assets. With inflation (3%) and longevity combined, there is a need for growth over a longer period, to support purchasing power against rising costs. You can manage longevity by working with your advisor or planner to develop a customized plan to address this issue. In some cases, a solution could be a slightly higher allocation to stocks or keeping a more aggressive target for a few years longer before scaling back to a relatively conservative approach.
Many families have a household budget to some degree, and thus may have little or no room to reduce expenses for basic needs. However — especially during times of market stress — it may be worthwhile to reduce or defer discretionary expenses. Here again, you could exercise some degree of control by postponing expensive vacations or the purchase of a new car. Consider, perhaps, domestic travel instead of international trips. It may be wise to delay the kitchen renovations or other costly home improvements another year or two.
Market volatility can be stressful for all of us. While the capital markets and government policy are not under our direct control — there are several other aspects of financial planning that are. Please reach out to your financial advisor to explore your options. A planner can help you make important decisions during these uncertain troubling times. He or she can serve as a guide as you navigate through all market cycles.
It’s been said innumerable times over the past two months, and it continues to be true — we are all in this together. Stay safe and secure.
Pete Hoover was destined to be a financial advisor. He has always been intrigued by numbers and money matters. They represent captivating puzzles to be analyzed, shaped and fit into place as pictures of financial solidarity. For nearly 40 years, Hoover has tackled those financial puzzles. In 2005, he launched Hoover Financial Advisors, located in Malvern. Hoover can be reached by emailing pete@ hfaplanning.