You're sixty five years old.
You're nearing retirement.
Month after month you're watching
volatility take your portfolio higher
or lower.
So here we are down 1000 points today.
Major losses across the market Tuesday.
What do you do?
What's the right way to think about the
day to day month to month volatility
that you're experiencing?
The typical advice in volatile markets
or for people who are nearing
retirement is for them to "lighten
up a little on stocks" or to "take
less risk."
That's not as easy as it sounds and
I'll explain why.
I always remind people that a 65 year
old woman has a better chance than not
of making it till age 85.
Now what about the reverse.
Let's say you're a man 65 years old and
you're watching this video.
You have a 22 percent chance of making
it to 90.
That could mean spending decades of
your life in retirement really just
living off your investments.
So in order to do that you might have
to take a lot more stock market risk
today than what previous generations
have had to do and then what you might
already be comfortable with.
Look here's the deal because of
inflation risk is guaranteed.
The question is: when do you want your
risk? Do you want it today or do you
want it much later when you have bills
to pay and you run out of money.
I think everyone understands intuitively
better to take the risk now while
they're younger while they can replace
any income lost in the market.
So that is really the question that
faces every investor.
And I think that's a more important
consideration than how to deal with
today's volatility.
Here's an example.
Let's say you're 60 years old.
You've got a million dollar portfolio
taking Social Security and you're
spending about 40 thousand dollars a
year. Chances are you don't have to
take more risk with your investments.
You'll be just fine.
Now imagine spending about ninety
thousand a year.
The math changes probably you're going
to have to take more equity market risk
and endure more fluctuation or cut back
on your lifestyle maybe spend a little
bit less money.
So that is the calculation that every
person that's close to retirement needs
to do and I think when they do it they
recognize, hey you know what in the
grand scheme of things a little bit of
stock volatility isn't the end of the
world as long as I can take it today.
Not in generations as Wall Street absorb
the number of body blows it took today.
Lehman here is going bankrupt.
Meantime Merrill Lynch is getting bought
out.
The 2008 financial crisis really played
havoc with a whole generation's worth
of investors psyche.
And it kind of led to a lot of poor
outcomes in the year since because
people equated every bout of volatility
with the next crash.
And people saw the next financial
crisis hiding behind every tree and
shrub. And so as a result it really did
end up with a lot of people that did
not get the benefit of the stock
market's recovery or paid too much in
fees to people that were betting
against the market or had too much cash
or some combination of those things so
you get a lot of bad outcomes come from
what was frankly a once in 100 year
storm. So there are going to be bear
markets there are going to be bouts of
volatility. There are going to be bad
years. It's part of why stocks work
long term is because there is risk.
But I think expecting the worst outcome
behind every bout of volatility is
probably going to have you invest in
your portfolio too conservatively.
One of the things that you'll hear from
people is they'll look at demography
and they'll say a really big risk to
stock prices are the Baby Boomer
generation. There are 70 million of
them still alive.
There are going to be exiting the stock
market as they retire and living off
that money.
That's almost childlike in its
ridiculousness.
So I'm going to take each of those
points one by one.
The first is being a boomer in the year
2020 is vastly different from being a
boomer in the year 1990.
We all understand that lifespans have
elongated. We all understand that
people are working longer.
We also understand that
intergenerational money is a much
bigger issue within wealth management.
People are investing now for their
grandkids' benefit.
So they have different asset
allocations than they might have when
they were just investing to live the
last five years of their life.
Really retirement is something that was
invented in the last 50 years.
It didn't exist.
So today's market and today's retirees
have much different attitudes about how
they're investing what they're
investing for.
They're going to live longer.
They're going to take more equity risk.
They're going to liquidate portfolios
much later if they ever even do it at
all. Today's ball game is a totally
different ballgame.
One of the most important concepts in
wealth management is after tax returns.
And so if you're invested in a strategy
that has you jumping in and out of one
asset class or one type of investment
frequently the returns that you end up
with are going to be affected by what
kind of tax liabilities you ended up
generating for yourself.
And when we vet other strategies and we
look at some investment schemes where
people are timing markets or people are
adding more and then taking more out
depending on volatility or wherever
they see happening in the economy the
after tax returns on those strategies
frequently look way worse than what the
investor would end up with if they did
almost nothing.
So let me wrap this up for you.
One of the things that you might want to
do is get a financial plan done so that
you can actually have a mathematical
reason behind the asset allocation that
your portfolio has.
Like why do I have this much exposure
to stocks?
What is this meant to do for me?
When can I lower that exposure?
Do I have enough exposure to carry me
through all of the goals that are
important to me and the end of my life?
Frankly that's a very personal
conversation. It's very bespoke.
There's no right answer that applies to
everyone. Everyone's got a different
situation but enduring volatility
probably is not going to change very
much from one 65 year old investor to
the next from one forty five year old
investor to the next.
The older you is going to say thank you
from the future if such a thing were
possible maybe they'll invent that but
I think what I'm trying to say is the
real risk is not what's happening today
in your brokerage account.
The real risk is to live a very long
period of time and to have a lot of
that lifespan take place during retirement.