Losing Money in the Market

After years of saving your hard-earned dollars and knowing it has to last your lifetime, investing in the markets when you’re retired can feel like putting all of your money on the roulette table and spinning the wheel. Red you win, black you lose. It’s imperative to know how to restructure your investment portfolio to hedge your bets against the inevitable market up’s and down’s. You need this money to live on.

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Losing Money in the Market

After years of saving your hard-earned dollars and knowing it has to last your lifetime, investing in the markets when you’re retired can feel like putting all of your money on the roulette table and spinning the wheel. Red you win, black you lose. It’s imperative to know how to restructure your investment portfolio to hedge your bets against the inevitable market up’s and down’s. You need this money to live on.

Please click on the links to learn more about:

Have a question about Losing Money in the Market? Contact us now.

The Impact of Market Losses
When is the next market downturn coming and how much money could you lose? Will the markets then recover enough to keep you from running out of money? While it’s a fact that no one knows when the next economic downturn is coming, retirees will likely face several down cycles during their 30+ years of retirement. In fact, the US economy has experienced 3 recessions and 11 stock market corrections of 10% or more in the past 30 years. In three of those corrections (some of us call them crashes), the stock market declined 19% or more and two of them saw a decline of over 30%.
Sequence of Returns Risk

Interestingly, for retirees in the “distribution” phase of life (i.e. withdrawing money from your investments), it really matters when these market corrections happen – early in your retirement years or later. This is called “sequence of returns” risk. Consider the following example. Let’s assume you have $1 million of retirement savings, that your invested money earns a modest 5% each year, and you plan to withdraw $60,000 each year to supplement your other sources of income. Will you have enough to maintain your lifestyle? Assuming no market corrections, yes, your retirement savings will support your lifestyle with over $330,000 left over. But what happens if you suffer a market correction of just 11% in the third year of your retirement? You run out of money in the 29th year. And if you suffer another correction of 22% in year 14? Your funds are depleted after 24 years.

There’s No Time to Recover in Retirement

You’ve probably been invested in the market for several decades already, so you know first-hand how the markets go up and down. One thing you had going for you before you retired was time. If the markets dropped, it didn’t matter to you very much: you kept buying into the market while it was low using your regular payroll 401k contributions. And you had the luxury of patiently waiting for the markets to go back up. But now that you’re retired, you don’t have that same luxury. Now, you’re having to sell low because you have bills to pay and need the supplemental income. There is no time to wait for the markets to recover, and the math starts to get a little ugly. Let’s say the markets correct 20% and you withdraw 5% to live on. That net 25% reduction in your account will require a 33% gain on your remaining funds just to get you back to even.

The hard part about investing is that you can do everything right – you can hold low cost, tax-efficient funds, regularly rebalancing your account. But if you need to withdraw and spend some of your money when the market is in a tail spin or even just languishing, it can have a significant impact on how long your money will last and how well you’ll be able to care for yourself and your loved ones. We sure can’t count on the markets to always cooperate with our plans!

Investment Strategies

Truly, you’ve spent a lifetime accumulating your retirement nest egg. We hope you agree that there is no reason to take unnecessary risks in your investment portfolio now. It’s more important to preserve what you’ve built and have reasonable return expectations.

You can limit the impact of the inevitable market rollercoaster by structuring your investments according to time and purpose. Invest more conservatively for assets needed early in retirement. Invest with more growth for assets needed later in retirement. We use a bucketing approach, segmenting assets into time bands. Traditionally, advisors not well versed in retirement distribution strategies will have you invest by account type: i.e. IRA’s one way and brokerage accounts another way. But this simply does not manage the sequence of returns risk of market corrections early in retirement.

Diversifying your investment holdings is another critical component of limiting market losses. You diversify by having your eggs in many baskets, or asset classes. Large cap, mid cap, small cap, value, growth, international, US, long bonds, short bonds – they all function differently in different economic environments and they all have different risk characteristics. Understanding how to build a truly diversified portfolio is paramount to managing market swings.

The Importance of Working with an Independent Fiduciary

Marsh Wealth Management is a fiduciary Registered Investment Advisor (RIA). And that matters. There is an important difference between an RIA and a broker dealer. In the broker dealer world, the advisor works for the “house”, who pays for their training, provides marketing support and pays for their pencils. In return, the advisors use the tools pre-designed to give the house an advantage. Don’t get us wrong – they may truly care for their clients’ well-being and be of high moral character. It’s just that they are constrained by a set of products pre-approved by their employer and the system is designed to reward selling rather than providing conflict-free advice. Broker dealers are compensated by commissions and, legally, all they have to do is provide a product that is “suitable” to you.

In the Registered Investment Advisor world, there is no “house” and we buy our own pencils. We have unbiased access to virtually all investments and use an independent custodian to hold client assets. We are required by law to put our clients’ interests ahead of our own. This is known as the “fiduciary” standard of duty. Since we are paid a flat percentage of assets rather than commissions on trades, we are not incented to churn your account with needless activity. We are also NOT paid through revenue sharing arrangements with fund families, so we have no incentive to offer one fund family over another. Our flat fee structure effectively puts us on the same side of the table as you. If you grow, we grow. And we all want to grow.

Learn more about our Wealth Management Solutions.

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