Volatile markets put personal planning to the test

If you are an investor, I’m going to guess that recent stock market activity has your attention. We are talking about large daily losses, the largest since the 2020 coronavirus bear market. Just this past Thursday, May 5, the Dow (Dow Jones Industrial Average) fell more than 1,100 points for a percentage decline of 3.3%.

Short-term traders can actually benefit from volatility. But most investors would rather see less volatility and long-lasting, strong uptrends. Ideal markets – that is, stock markets that don’t decline – are nonexistent.

This is where a risk discussion comes into the equation. No matter the cause of volatility, each investor needs to accept it as part of investing in the stock market. But how? That depends on personal goals, investment experience, time horizon and the work you want your portfolio to do for you. For example, in retirement, many, if not most, investors want their investments to pay for living expenses and to increase payments as prices rise due to inflation.

The Dow has declined around 11% and the S&P 500 is down about 14% from their respective peaks at the beginning of the year, and the Nasdaq is down roughly 25% from its peak on Nov. 19, 2021.

If you are a retiree who depends on his or her investments to pay bills, you might be unsettled. But you don’t need to be as long as you are following a plan that incorporates the essential elements of retirement investing that fit your particular situation. The essential elements are always the same: time horizon, which is usually based on your age (“usually,” since some have longer horizons tied to legacy interests); assets available to invest (creating interest and dividends to fund withdrawals is safer than selling positions, but calls for more capital); and cash flow requirements (withdrawals to pay bills).

These elements come together after reaching an understanding of volatility, risk of loss, the effect of rising inflation on your lifestyle, tax considerations and whether you understand that the most control you have in this equation is how much you spend, especially if you are on a budget and see prices rising.

Without a plan that is customized for your particular situation, difficult market periods can lead to selling your stocks with the intention of getting back in at a “better time.”

If you review historical studies, you’ll probably reconsider the impulse. The “Impact of being out of the market” section in the 2022 “Guide to Retirement” (tinyurl.com/5n7kup7n) by JP Morgan, a financial services company, is a good resource.

Looking at Jan. 1, 2002, through Dec. 31, 2021, your return would have been 9.52%. If you missed the 10 best days, your return would drop significantly to 5.33%. Miss the best 30 days? You are down to 0.43%. As the guide notes, “Seven of the best 10 days occurred within two weeks of the worst 10 days.” Conclusion: Don’t think you can time your reentry without a crystal ball.

While past performance is no guarantee of future results, it does provide some insight. There will always be uncertainty when it comes to the markets.

Where you are at risk is if you need to sell stock market holdings in order to pay your bills. The answer is: Make sure your plan gives you a clear understanding of how to withdraw funds to pay your retirement expenses without selling into a down market.

If you don’t have a plan, make one. Reach out to a seasoned investment adviser whose expertise is retirement investing. If you are interested in a column on how to find one, email me at readers@juliejason.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions / comments (readers@juliejason.com). Her awards include the 2021 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.

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