We have experienced a significant rebound in investment returns since late March, but if current conditions worsen are you prepared for another market downturn?
The S&P 500 Index is up nearly 40% from its low on 3/23/2020. The chart below from CNBC is a visual representation of eight months through May 2020. That is a remarkable rebound, and we are encouraged to see that. See the chart below from CNBC for a visual representation of this.
From an investing standpoint, however, it is quite possible that the market will experience another downturn going forward. Depending on the amount of time it takes to develop a widespread treatment and vaccine, additional downside for equities is certainly a real possibility.
When professional asset managers were recently asked about the state of the markets, 68% believe that we are experiencing a “bear market rally.” In other words, more than two-thirds of professional investors believe that the recent market rebound is not yet the beginning of a new bull market, but instead feel that there will be another downturn.
For some historical perspective, this is the tenth bear market since 1950. The average duration of the other nine was 16 months. Previously, the shortest recovery was three months back in October 1987 which was the global market crash known as “Black Monday.”
While it is certainly possible that pent-up demand would lead to a V-shaped recovery in the fairly near future, we are inclined to think that there will be considerable volatility for several more months in the midst of disappointing corporate earnings announcements and a continuation of historical levels of unemployment.
Three Things to Do Now
Ultimately, we cannot predict what will happen in the stock market, but we can prepare for it. Here are the things we would recommend doing in order prepare.
1. Determine how much money you can afford to take from your portfolio.
We have developed our Withdrawal Stress Test™ in order to show the relationship between your withdrawal rate and the allocation of your portfolio. The lower the rate of withdrawal from the investment portfolio, the stronger and more sustainable it is over the term; a low withdrawal rate also provides more flexibility in terms of the allocation of the portfolio. We give more information in this article about how to determine a sustainable withdrawal rate.
2. Create a plan that has enough cushion to weather a downturn.
Our top priority as a firm is preparing our clients to achieve a successful retirement. That means that our clients can behave with poise and calm, even when most investors are resorting to panic.
We do this primarily through the use of a tool we call the Retirement Shock Absorber®. It is a surplus of capital above the minimum amount of assets required to fund your retirement.
The Retirement Shock Absorber® is most important during those times of inevitable volatility and market decline. Now that we’ve had a significant rebound in the markets, it can be a particularly good time to reassess your financial situation and determine if you are on the right track.
3. Develop a Plan B™ to help you adapt to changes in circumstances.
We know that as life happens, plans change. Nothing works out exactly as planned. Whoever thought the entire country would be shut down for a virus?
Wealth planning is all about contingencies. The main reason people lie awake at night worrying about stuff is fear of the unknown.
That’s why we want to identify these unknowns ahead of time and consider the potential impact on your plans. It doesn’t guarantee a positive outcome, but it does decrease the chance that your goals will be derailed by something unexpected.
We call this our Plan B™. It is designed to help anticipate the unexpected by modeling the effects of various “what if?” scenarios that are out of your control.
How would your portfolio hold up if we were to experience another big downturn? Do you know the answer? More importantly, do you know how those losses could affect your plans to retire?
We can’t predict the future, but we can prepare for it. If you’d like a complimentary second opinion of your financial situation, just click here to request an initial conversation.