In the month of July, Wall Street enjoyed a shot of strong corporate earnings with all three major indexes hitting record highs. “The earnings season in general seems to be really quite strong and there haven’t been any significant surprises,” said Paul Springmeyer, investment managing director at U.S. Bank Private Management. According to Yahoo Finance, the S&P 500 is trading about 18 times earnings estimates for the next 12 months, which is well above the long-term average of 15 times.
So when earnings are strong we imagine how high we can fly. It’s no wonder then that 61% aged 55 or more have no plans to re-evaluate their investment approach and 49% of 1,250 individual U.S. investors indicate they have not taken action to review their portfolios, from the “Helping Meet Investor Challenges Study” by Dreyfus, June 19, 2017.
As I wrote back in April of this year, up until the time you make work optional you probably took advantage of dollar cost averaging and buy and hold. The combination is a practice that can help protect your investments against fluctuations and downside risk in the market as you add funds to your accounts. Instead of attempting to time the market with one investment, you buy with a fixed dollar amount on a regular schedule, like monthly. By sticking to your investing schedule when the market turns south and your investment falls in value, you may be able to buy more shares at lower prices are cheaper. Dollar-Cost Averaging does not assure a profit or protect against loss in declining markets. Such a plan involves continuous investments in securities regardless of fluctuating price levels of such securities and the investor should consider his/her financial ability to continue purchases through periods of low levels.
But let’s understand just as you apply different clothing strategies based on the weather, it makes just as much sense to pay attention to the economic environment, your specific goals and objectives and apply different investment strategies. Buy & hold was your friend when you were making regular investments. The same strategy can become your worst nightmare when there are heavy losses at the same time you are taking withdrawals.
Beginning this year here come 76 million Boomers born between 1946 and 1964 who turn 71. Please note when you turn 70 1/2 the IRS has a plan for you. You must start taking from your traditional retirement accounts (401(k), IRA, TSA, Keogh) at a starting rate of 3.65% of the previous year’s balance and that rate will increase every year for the rest of your life, according to investor.gov. Stick around to 95 to see your RMD withdrawal set well in advance at 11%. It’s your tax dollars at work. Which begs the question, what’s Your plan?
Please notice in the first paragraph here Springmeyer’s no “significant surprises.” Rather than stand like that ostrich with your head in the sand revealing some very dear parts to just hang out in the wind, it makes sense to this observer that preparation trumps predictions.
Choose Your Loss Participation Preference
Look for Evidence
Source: Investor’s Advantage Corp.
When it comes to understanding what it takes for an account to get back to even many investors miss-calculate. Here the math is done for you. Investors often declare they can withstand a 50% loss not recognizing it takes a 100% gain for the account to fully recover. Notice how as the loss becomes higher the gain must be exponentially higher to put the account at the level it was prior to the loss. Now is a good time to see how low your account may have been affected during the market volatility.
But when there are nasty surprises the question can quickly become, how low can markets go? On September 30, 2008 the DJIA closed at 10850. One month later the DJIA finished at 8175, according to Yahoo Finance. You probably didn’t notice that decline of 24.7% in thirty days. But if there was $1m in your account at the beginning of the month and you looked every day, by the end of the month your account is minus $250,000 leaving you with $750,000. Now wasn’t that fun.
Here’s where the rubber meets the road. Hypothetically, let’s suppose your IRA finished last year with $1m but after a loss of 57% finished with your balance at $430,000 as you turn 71 and take a modest withdrawal of 3.65%, or $36,500 from the previous year’s balance of $1m. As a result of over 60% drawdown (market loss & income taken) you wake up to a balance of $393,500. This plane is coming out of the sky and it’s not going to be a pretty landing. This is just the first withdrawal, please keep in mind if this account is a traditional retirement account, increasing withdrawal ratios apply every single year for life.
These rates are used for hypothetical illustration only and may not be used to predict investment results. Income from investments may fluctuate and the value of the investment may fall against the interest of the investor. Investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. This analysis is provided for informational purposes only and should not be construed as a recommendation.
Source: Investor’s Advantage Corp, 8/1/17
Graph represents a hypothetical account starting value, $1m with 57% decline and $36,500 or 3.65% withdrawal.
According to me it’s never about the prediction, it’s always about the preparation. So pretend Yogi Berra is right with his famous words, “It’s like déjà vu, all over again!”
“This chart shows how badly the financial crisis of 2008 hit the Dow Jones. Four of the top five biggest losses happened between September and December 2008,” wrote Kyle Anderson, Money Morning, August 25, 2015.
When was the last time you went for a drive? I bet it’s been awhile that you could afford to waste time, money, and fuel. I also bet you’ll never have and never will get on an airplane without having a specific goal as to where you are going and when you will get there. In contrast, too many investors are flying blind. Let me suggest that you start planning your financial success by setting personal goals for how much money you will need the year you choose to make work optional. With all of the uncertainty today, there is no better time than now to prepare for the good, the bad, and the unforeseen.
The proof is in the planning.
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The information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results. S&P 500 is an unmanaged index of 500 widely held stocks