The Coronavirus triggered the fastest decline in stock prices we have seen since the Great Depression. While high volatility is likely to remain, what things should you be doing to ensure the economic impact from this doesn’t derail your retirement?
- Take a deep breath. While no one wants to see their account values decline, volatility is a normal part of investing and we see declines like this in the markets once every 7 to 10 years. Selling now when prices are down anywhere from 20%-30% could cause a real negative impact in your ability to retire.
- Evaluate where you are. The methodology behind projecting retirement income has come a long way. Instead of guessing what return you will earn over time, many advisors now use Monte Carlo analysis which accounts for the risk (volatility) in your investment portfolio. A 30% decline is rare, but if planned for appropriately, it isn’t out of the realm of what stock investors should expect and shouldn’t completely derail your retirement. When you evaluate what the change in your retirement income will be given the temporary decline in value, it will likely be lower, but it is easier to interpret and act on that information than it is to panic over a large dollar decline. It could mean working an extra year, reducing the amount of income you take in your first few years of retirement, or it could have no impact depending on how you are invested.
- Rebalance. If you are managing your investments on your own you should strongly consider rebalancing your portfolio. If you are working with an advisor that hasn’t done any rebalancing, you may want to reevaluate what they are doing for you. Consider the following example. On February 19th, 2020 Tom had a $250,000 portfolio that is 70% in stocks and 30% in bonds. On March 23rd, 2020, with the decline in the stock market, your portfolio would now me made up of 61% in stocks and 49% in bonds. Roughly 10% of the portfolio would need to be shifted back into stocks to get back to the original allocation. By doing so, when the market comes back you will have more money in your investments than you did before the crash.
Times like these reinforce the importance of having a financial plan. A strong cash reserve of 3-6 months of living expenses, while very boring, is crucial during these times to help get through any disruptions in income without having to touch your investments while they are down. If you have more than that in cash, now may be a great time to invest that extra into the markets while we see depressed values. If you’d like to discuss the impact this has had on your finances, please feel free to reach out to us.