It is often the case that we learn from our clients. Ted and Ilene Grant moved from Westlake Village to Malibu a couple of years ago. I saw Ted at the gym right after the recent Napa 6.0 earthquake where he said he and his wife were suddenly inspired to take action. Ted pointed out that there was about $1 Billion dollars of damage in the area in about 10 seconds. Ted went on to say that he wasn’t sure when the Big One would hit Southern California, but since they now live in Malibu he and his family discussed how bad things might turn out for them if there was a 6.6 earthquake just off Catalina. Ted said he didn’t want to be talked as a statistic about on the news, he said he would much rather tell his own story in person . Here’s a video description in about 5 minutes:
The markets today seem to have taken on the same satire of Mad Magazine’s Alfred E. Neuman who is famous for “What, Me worry?” Or it’s plain stupidity. Unlike Mad Magazine, it may not be funny. The good news is that the job market appears to improve, consumers appear to be back, and there is strong business spending. As the markets continue to march north hitting new highs it has shrugged off so many things to worry about. It is not likely there will be QE infinity. Businesses are spending, but they are not paying at the same income to new hires. It has yet to take into account news of flat gross domestic product growth in the EU, mounting geopolitical tensions, and a sharp drop in London real estate prices, which was one of the hottest real estate in the developed countries. Then there’s Pakistan’s military offensive, Germany’s steep demographic cliff dive, and France may be headed into a recession as well.
David Mclaney opined, “Power breeds certainty, and certainty has no clout against the unpredictable, whether you are playing poker or running a country.” Governments have a lot of power but today elected officials cannot engineer life and death. Coming home from Denver recently I saw a sign at LAX that read, “When LAX was built the average age of death was 68, today the average age is 79.” 2014 is the year that most Americans turn 53. That’s important because 53 is the age that peak spending occurs. As we study the chart we have shown here, we can see that spending falls like a waterfall as Americans turn 54 and older. Then we become like my father a World War II vet; we’re all gone.
"Failing to prepare is preparing to fail. John Wooden"
Let’s say you intend to retire in the next 5 years. Just suppose the markets like the S&P 500 peak at 2200 and then drops 80%, for example, in the next 2 years. An 80% loss means $1M drops to $200k. Suddenly, that’s not much of a retirement. It could never happen you say. Who knows, but rather than look at the average and hope for the best, let’s consider the worst case scenarios and plan accordingly. Let’s remember that from 2000-02 the Nasdaq dropped 80%. Let’s look at history to see the stock market went down like the Titanic providing investors with a 90% loss, from 1928-29 to 1932-33, both from Yahoo Finance. From 1932-33 it took about 22 years to get back to even, according to Yahoo Finance. Can you think of anyone who doesn’t need any money for 20 years or more? Neither can I. If there were investors who held on to their stock positions after a 90% loss they needed a 1000% gain just to get back to even. I don’t know about you, but I don’t like those odds. The question that you need to answer right now is how can you reduce downside participation when the markets turn scary?
If investors can limit losses to say 20% they only need a gain of 25% to get back to even. That’s staying in the game. If on the other hand, as we have shown, when the markets turn ugly as they did in 2008, had your value at the beginning of the year been $1M and you started withdrawals of $40,000 a year and didn’t change your income needs, your funds ran dry by 2010-11. What a life. Thomas Monson said it best:
"Learn from the past, prepare for the future, live in the present."
To follow Mr. Monson’s recommendation please make the time to do these 3 things this month:
- Don’t be complacent. Ask for help, if you need it, but do look back at 2000-02 and 2007-09 to see how your portfolio performed from peak to trough.
- What can you learn from your history? What could have done that might have helped you keep your assets intact?
- How would your account look now? Consider 2 worst case scenarios started taking income either in 2000 or 2008.
When the good, the bad, and the ugly happen, whether due to nature or because of man, it is far more interesting when we are able to tell our own stories. Alive and well.
by John L. Grace