Thinking Ahead – This Too Shall Pass
History shows that recoveries from market downturns can be substantial and unexpected
The economy appears on the brink of a recession imposed by the Federal Reserve to cool demand for goods and services and cool off inflationary pressures. Everywhere one turns, there is negative news regarding the economy and the markets.
This is a difficult environment in which to be an investor. What helps is to keep an eye on history. Recessions come to an end. Bear markets eventually recover. We may still be in the early stages of this economic cycle, but it is important to note that recoveries in markets and investments typically begin well before any economic recovery is noticeable. This is because markets are always looking forward. It is nearly impossible to use actual economic data to make investment decisions. By the time the news is out there, markets have already acted on it. In past severe market downturns, many investors, seeking to avoid further pain, cashed in their investments – usually during the period when economic news was at its worst. The rationale is usually that they will “get back in” when “things settle down”. The result, almost inevitably, is that they picked a time to sell which was right before markets started to anticipate a future recovery. And when recoveries do happen, they can be very rapid, and very strong. Those who “throw in the towel” at the wrong time end up locking in losses for the duration of an economic cycle which may last for many years.
The people at Dimensional Funds created an interesting chart which shows just how substantial the “bounce back” can be after markets suffer a severe selloff. Everyone needs something to look forward to right now, so I am sharing it here. https://www.dimensional.com/us-en/insights/history-shows-that-stock-gains-can-add-up-after-big-declines
But I’m retired! I can’t afford to wait for a recovery.
There is some truth to this. It is why we suggest that those who are dipping into savings to provide retirement income need to diversify and reduce portfolio risk. Unfortunately, in this downturn diversification has not been as effective as it usually is. Even investors who “did the right thing” and reduced the percentage of their portfolio allocated to stocks have suffered significant losses this year. So what to do?
- Cut back on non-essential spending. If you are living off your investments, now may not be the best time to be making large discretionary purchases such as expensive vacations, home remodels, and the like. To the extent you can cut back on spending and reduce your investment account withdrawals, it may be wise to do so. The need to cut back varies depending on the strength of each person’s financial plan, of course. If you are uncertain, or worried, check with your financial planner!
- Reconsider your Retirement Income / Social Security strategy. Retirees waiting to claim social security (and drawing heavily on investments while they wait) may want to reconsider the strategy to reduce the need to draw on accounts depleted by the downturn. Talk to your financial planner.
- Update / reconsider your financial plan. You may find out that this current downturn does not have as much of an impact on your plan as you thought. Spending a little time with your financial planner may be reassuring.
If volatility is too much to bear, talk to your financial planner about strategies that may be able to limit or eliminate downside risk while allowing you to participate at least partially in the recovery that is yet to come.
It should come as no surprise that all three of the recommendations here include “talk to your financial planner” as a course of action. If you are worried, concerned, or troubled by current financial events, give me a call. Let’s open up the plan and strategize.