How to keep your retirement plans on track despite the volatility

keep your retirement plans on trackOn Monday morning my friend texted me: “Holy cow!  Don’t jump!”  He was referring, of course, to the 1000+ point drop in the Dow.  Thankfully, after more than 20 years in this business, I’ve gotten used to wild swings, so I wasn’t on the ledge (although in 2008 I was glad I work in a one story building).  That said, volatility in the market can produce much fear and anxiety, especially if you’re at or near retirement.  There is a 100% chance that market volatility will continue, so here are 5 things I’ve learned after two decades of bulls and bears that can help you keep your retirement plans on track.

Markets have recovered from every single downturn in history.   Every. Single.  One.  The Panics of 1893, 1896, 1901 and 1907 (Seriously, calm down already!).  The Crash of 1929.  The recession of 1937-1938.  The Flash Crash of 1962.  Black Monday in 1987.  The crash after Iraq invaded Kuwait.  The 1997 crash caused by the Asian currency crisis.  The Dot-com bubble in 2000.  The crash after the September 11 attacks. The selloff in 2002.  The financial crisis of 2007-2009.  The Flash Crash in 2010.  The markets are higher now than after every panic, bubble, crash and crisis in history, but be careful because…

You are not the market.  Your personal experience with market volatility will largely be impacted by the actions you take before and during a crisis.  Were you poorly diversified?  Was your asset allocation totally inappropriate?  Were you taking too much risk?  Did you sell in a panic?  Did you wait to get back in until the markets had already recovered?  Did you stop making 401(k) contributions when things went south?  Investment returns are not investor returns.  Each year Dalbar does a study to see how well the average investor does compared to the markets.  In short, the average investor only captures a fraction of the market return, largely because of poor behavior, so…

Sometimes it’s good to have help (especially if you’re near retirement). There are some people with the time, temperament, knowledge and discipline to handle their investments on their own.  Others could benefit from a little help.  This is especially true the closer you get to retirement because the issues you’ll be confronted with are different.  Before retirement the major issue is saving.  Most of us are at least familiar with the concept of saving (regardless of whether or not we’re doing it).  We’re less familiar with the many moving parts that make up the typical retirement plan: calculating how much is enough, settling on an appropriate asset allocation, risk management, cash flow management, pension payouts, periodic rebalancing, retirement plan distributions, estate planning, Medicare, Social Security and the tax consequences of certain distribution strategies.  You don’t want to mess those things up because…

Your runway is shorter now than it was during the last crisis. On average, stocks experience a 10% selloff about once every year and 20% pullback every 3.5 years.  The average time of recovery for the former is about 4 months.  For the latter it takes about 22 months.  So while my earlier point is absolutely true—markets have always recovered—you may not have enough time to wait it out.  The closer you are to retirement, the closer you are to withdrawing money from your accounts.  And if you’re taking distributions while the markets are down, your money won’t last as long.  So use the current crisis as a not-so-friendly reminder to…

Focus on what you can control. John Wooden once said: “The more concerned we become over the things we can’t control, the less we will do with the things we can control.”  It’s easy to focus on headlines, markets and political uncertainty, but we can’t really do anything about them so it’s an exercise in frustration.  We can control things like saving, debt reduction, asset allocation, and risk management, however.  Focusing on those actually produces results.  Unfortunately, the bull market of the last six years has lulled many into a false sense of security.  Use the current volatility to make sure that your portfolio is appropriate and your plans are on track.

~ Joe

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