Defense Wins Championships: A Financial Look Forward

Many economists and market analysts are predicting a recession sometime this year. To most observers, this is based on the background of rising interest rates and inflation.

Generally, stocks and other assets struggle during a recession and sometimes, the drop in valuations can be dramatic, like it was in 2008 when we saw markets drop by more than 50%!!

As we have written before, it took until 2013 to recover to the values of 2007. If you are going to be retiring in the next 10 years, or have retired in the past 10, this post will be especially applicable to you.

Who Knows How This One Will Go? Doesn’t It Always Come Right Back?

Given how long it has been since our last recession, history suggests that the next one could be very substantial as a result of that delay. Is this the end of investments?

A lot changed in 2022, so as we look forward you might have to take steps to protect what you have.

After all, as you approach retirement, it is more important that you don’t lose money than making a big return. If the value of an investment drops by half, you will spend years trying to dig out of the hole instead of growing your assets and more importantly, your income.

For folks who participated in the late 1990’s dot com boom, when the bust came, the market took 13 years to get back to where it was in January of 2000.

Many on Wall Street call that the “lost decade”.

If you are drawing on those assets for retirement, you may never dig out of the hole (that is the math) and you may have to make hard choices about lifestyle changes for fear of running out of money.

Are Stocks On Sale Right Now?

I remember back in late 2000, many folks were excited because so many “hot” stocks were “on sale”. Many had dropped 25,30, 35% or more and their brokers were telling them to “dollar cost average”, buy more because it was on sale.

I heard professionals say, “if you liked it enough to buy at $100, you have to buy it at $60”. Unfortunately, many of those kept going down and so many (remember and the sock puppet?) went out of business altogether.

We can’t be sure that will happen again, but my question to you is; what if it does?

I would encourage you to look at it this way, especially if you fall in the retired or soon to be retired group mentioned above. If you were to miss a rally of 10-20% to the upside, would that be better than losing half of your wealth? The math says it isn’t even a close call.

Should I Be Doing Anything Now to Guard My Savings?

If you have a plan in place, you are doing the single most important thing you can; to have a plan.

To be effective, the plan should include 4 elements.

  1. Purpose: is the money for retirement? Charity? Legacy? Start a business? (Any funds marked for retirement funding have a limited time frame to recover from losses).
  2. Time Frame: how long until I am going to need or use these funds? (Any money being used to create retirement income should be considered “illiquid” as spending it will reduce your income production).
  3. Investment Strategy: The amount of risk exposure and volatility should be in line with the amount of time you are willing to devote to managing your investments. If you are too busy to pay attention, I suggest you consider using tools with fewer moving parts, or add guarantees.
  4. Loss Limitation Discipline: While the market has had a tendency in the last 100 years to trend up, companies come and go. Of the original 500 stocks in the S&P 500 back in 1957, 86 are still in the index. According to a recent study by McKinsey found that the average life span of companies listed in that original lineup was 61 years, while today it is less than 18 years. They believe that 75% of the companies listed in that index will be “disappeared” by 2027!! Some will merge, be bought out or just go out of business. This is why, if you invest in this manner you should have the discipline that goes with that. There are many studies that show avoiding major losses is more impactful than catching a hot stock or investment.

Upgrade Your Defense to Solve the Retirement Puzzle

Investing and retirement are long term objectives, with a finite timeline (we will all die eventually). Something that might have been a great investment 20 years ago, might not be appropriate as you start to live off your assets and draw them down to finance your retirement.

Take the time now to reflect on the steps I have outlined above, then apply your answers to what you are currently doing. Once done, you can take the time to look objectively at your situation starting with the outcome (purpose) you are working toward and work backwards.

This will help you to determine if your defense is playoff ready! Then get ready to enjoy your happy retirement.

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