Given the dramatic volatility in the stock market this month I want to share our slogan with you; Bull or Bear; We Don’t Care! That said, it is safe to say that investors who stay invested are followers of the buy and hold strategy. For people who don’t need the money from their investments that is a strategy that can work. If it is the case, however, that income is needed that strategy could be the road to disaster. I will not bring out my Ouija Board in any attempt to predict the future. My goal is to encourage you to prepare for market disruptions to help improve retirement outcomes. Take these 3 steps:
- Learn from 2000-02 and 2008-09 what might have worked for you better than the roller coaster ride.
- This time is different so I encourage you to diversify unlike you ever have before.
- Search for active management strategies that may better help you manage volatility.
As we have shown before, investors in the S&P 500 starting with an opening balance of $1M on 1/1/08 finished with nearly $1.4M by year end 2013. At the same time, the blended benchmark shown below, ended the year north of $1.7M. By 6/30/14 the S&P 500 was valued at $1,484,685 and the blended benchmark was valued at $1,816,596, a difference of $331,910 or 23.7% more than the S&P 500. That’s the good news for those who did not need to take income.
10,000 a day
But let's be realistic. Roughly 10,000 Baby Boomers will turn 65 today, and about 10,000 more will cross that threshold every day for the next 15 years, according to Pew Research. So rather than look at the most rosy scenario it might be better to look at a more realistic situation and plan accordingly. Things are changing.
Blended Benchark is 60/20/20 blend of the S&P 500 Index, the Merril Lynch US High Yield Master II Index, and the Case-Schiller 20 City Home Price Index, calculated and rebalanced annualy. Indices are unmanaged measures of market conditions. It is not possible to invest directly in to an index. Past performance is not guarantee of future results. Example used as illustration only, not indicative of any particular investment, actual results will vary.
Instead of holding on and adding to your investments during what many have called The Flat Decade, let’s suppose you on New Year’s 2008 you had $1M and you were certain on that was a good time to start taking out $60,000 a year as part of your retirement income. As you can see in the chart above, after putting your withdrawals on auto-pilot, you wake up with an account valued at about $160,000 on 6/30/14 in the S&P 500 (red). With the same assumptions, but owning three asset classes (in blue), instead of one, your account was valued at over $527,000 at the end of the second quarter. In the first scenario, after more withdrawals or another bad year it might be game over. In the more diversified scenario you remain in the retirement game. Please understand, this is not a recommendation as there is no capacity to own any index. At the same time it is one beautiful example of how investors could have held their own through the good, the bad, and the ugly. Let’s also be mindful that these results are as up to date as possible through 6/30/14. We will re-visit the data through the end of the year.
Expect the unexpected
Within four days after Bill Gross shocked the world by leaving PIMCO for Janus I happened to be one of the keynote speakers before 100 of my peers in Newport Beach. One of the things we discussed, thanks to Allianz who owns PIMCO is that severe market swings occur much more frequently than many investors realize. Over the past three decades such violent market swings have occurred once every five years. Savvy investors have searched for strategies aimed at actively managing volatility in their portfolios that may help soften the unexpected effects of these unwelcomed surprises, without sacrificing the potential for growth, resulting in a smoother ride during the accumulation phase and a potentially longer lasting stream of income distributions.
Paul Krugman is a leading economist who is steadfast in his belief that the US government should have printed much more money than we did. Ron Insana on CNBC asserts that the Fed’s policy of creating money out of nowhere is the key to solving all of our financial problems by saying the practices are “enlightened policies” . On the other hand, Roseanne Barr quipped, “Why don’t we give every broke person $10,000 a week? Then the rest of us can invest in liquor stores, casinos, and porn websites.”
If you are prepared for a 6.6 earthquake that never happens, it doesn’t matter. The recent Napa quake, however, did $10 billion worth of damage in about 10 seconds, according to CNN. Now is the time, in my opinion, to prepare for another series of bubbles to burst. 2008-09 was called the Great Recession. As we get closer to Halloween allow me to be a Devil’s advocate. Let’s suppose a Great Depression II and deflation, not inflation, just might be around the corner. As one of my clients said recently, “It’s all about the preparation because my husband and I want to be on the news, not in the news.”
by John L. Grace
The opinions expressed in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser Investors Advantage and NPC are separate and unrelated companies..
Neither diversification nor an investment strategy can guarantee a profit or protect against a loss. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. This material contains forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements, because, by their nature, they are subject to known and unknown risks and uncertainties.