Sometimes, I think the financial press does a disservice to investors. Consider the following excerpt from a December 30, 2018 Washington Post article titled. “Market’s recovery will face head winds”:
Before stocks hit an all-time high in September, they had created enough wealth in the past decade to pay off the $21.9 trillion national debt.
“Since then, the Standard & Poor’s 500-stock index has dropped 15 percent. Declines in stocks have slashed $4 trillion in wealth from shareholders and reduced the historic bull market’s gain to $15 trillion.
Those not paying attention to the market’s twists are soon likely to get a wake-up call. In the next few weeks, tens of millions of Americans will open their quarterly retirement statements and see decimated accounts.
“Individuals are scared to death. They are not cautious, they are scared to death,” said Jeffrey Saut, chief investment strategist at Raymond James.”
As I read this, I can see the undisciplined investor panicking by selling his investments and going to cash. He has now decided to be a market timer. How will that play out? Let’s say this investor made this move at the 15% decline mentioned in this article and decides not to reinvest in a basket of stocks representing the S&P 500 until the market “fully recovers”. In doing so, he will lock in a loss on let’s say a $500,000 portfolio of $75,000. Rather than living with a short-term paper loss until the market recovers, this investor actually loses the $75,000.
What if the investor had been given the advice as he retired to keep one years of living expenses in cash when he approached retirement 2 years ago. And in the first year, he kept replenishing this cash position monthly as his expenses were met from withdrawals from this cash position until the market dip in September.
Now, living off this cash, this retiree is much calmer than his peers who reacted and executed the “cash out” strategy. This investor can now ignore the “siren song” of cashing out his entire portfolio in this down market and allow his diversified portfolio to capture the next market upswing whether it be in US stocks or international equities.
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Peter B. Smith is a Family Wealth Advisor at the Planning Solutions Group in Fulton, MD and is an Annapolis resident. He can be reached at 301-543-6008 or by email at email@example.com.