By Brad Thomason, CPA
There’s nothing like a drop in stock prices to remind everyone what they already know: that stock prices can fall.
Lots of people are paying attention to changing market levels right now, and wondering if they should take some action as a result of them. You can hardly blame them. But in some respects that’s like wondering if you should have fire insurance after you see the flames.
In principle, we like the idea that the stay-or-go question ought to be tied to whether or not you’ve achieved the amount of money you need to retire on. When you have, it’s fair to ask if any of your at-risk investments should remain a part of your portfolio. Once accumulation reaches the level of an apparent win, the argument to get off the field becomes much stronger. In other words, it’s ideally a decision which is best made without reference to whether the market closed up or down on a particular day.
In practice that means you may exit a rising stock market. Which as far as it goes, doesn’t sound appealing. The obvious problem though is that you won’t know until after-the-fact whether it really was a rising market, or one which had reached its peak ahead of a reversal.
The market today is more or less exactly where it was at the beginning of the year. I can tell you from long experience that if you had been discussing reallocation back in January with a retired person with investments in stocks and funds, it would have been the most common thing in the world for that person to express resistance on the grounds that doing so could cause him/her to miss the next run-up.
Well, guess what? If they are still holding stocks and funds today they DID miss that next run-up. They have spent 10 months in the market with nothing to show for it, at least as of today. If prices rise from here, then maybe they catch the next run-up. But the one they stayed in for back in January is now gone forever. And looking at the future from the perch of today, there’s no way to know if there actually will be a next run-up anytime soon. Nor, if there is, that it won’t eventually reverse and dissolve right before our eyes just like the recent run-ups of 2018 just have.
You can hopefully see that there is a certain merry-go-round aspect to this whole thing, making it possible for a given investor to get caught up in this giveth and taketh cycle for quite some time.
People who aren’t retiring for awhile can probably ride out any fluctuations. Historically, that has been the case. Whether or not that’s the best course of action is a different story. But the indications are that it is at least doable.
People who have already retired should have already made the assessment of whether or not assets of that type were consistent with their goals and needs. If they haven’t, they should make that assessment now. Not because the market is falling. But because it’s something that is a critical step in a secure retirement.
On a final note, a word of caution to those of you who were working to “a number,” almost got there, but are now just a little bit short of it because the market didn’t keep going up. There is a temptation to stay until you achieve that number. It is often phrased as, “Well, now I can’t afford to sell.” I’d like to invite you to sit down in a quiet place, perhaps with a nice cup of coffee, or maybe something stronger, and work through the logic of that position. Or rather I should say try to work through the logic of it.
Warren Buffett has stated that a key realization for him was the fact that a person who loses money doing activity #1 is not obligated to continue with activity #1 in pursuit of making it back. You can make it back with any number of other activities, many, and maybe all of which may be a much better prospect than activity #1.
If you don’t like the idea that you were at 99% of your goal, but now you’re at 97%, how are you going to feel if you wake up two or three months from now at 90% (or 80%...) all because you tried to make back that 2% the same way you lost it?
Thinking that one can fully ignore the market when making investment decisions is not that realistic. I’ve read plenty of articles on why people should. But I’ve met few actual people who do. That said, the broader point here is that your decisions to invest or not invest in anything should ideally be made in consultation with the progress and needs of your plans, and not any particular move in prices.
If it makes more sense to protect what you already have than it does to risk it in the hopes of maybe making more (especially if you don’t need more), then that probably tells you a lot of what you need to know about what to do next. And looking at where the market closes this afternoon really shouldn’t add much to the equation.
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