While investors are advised to seek professional guidance when it comes to managing their retirement savings, we shouldn’t necessarily just rely on the advice of others.
When stock markets move significantly, especially when they move downward or may be expected to, this often attracts a lot of attention from retirement savers. Knowing what to do isn’t always easy for them, and they therefore will seek professional advice from others to help them decide.
Given that we’re at a time where people are already worrying quite a bit about a good-sized pullback or worse, and with big issues such as the slowing economy and the trade war between the U.S. and China making the stock market particularly volatile, this is becoming an even bigger issue lately than usual.
Most investors do not even have a clear plan on how they are going to manage their retirement money, and given how important this should be to us, we do need to have a plan and a good one. A lack of a plan will very often either result in indecision where a decision should be made, or will cause us to make the wrong decisions because we are not properly prepared to decide and are not properly informed.
Those who have no plan and not much of an idea what a good plan would look like definitely need advice from someone, whether that be direct advice or seeking out information to learn how this whole thing should work.
The first person we need to consult here is ourselves though, where we need to take account of whatever beliefs and goals that we may have. While we may ask others for advice, and this conflicts with our views or beliefs too much, we simply won’t take the advice.
Most importantly, we need to learn enough about investing to be able to tell the good advice from the bad, and there is plenty of both out there. Advisors may also have a vested interest in the outcome, selling us investments or keeping our funds with them, as well as with those who may be swayed by a certain belief system about investments that may not turn out to be the best or even that good.
We need to start by seeking to understand how certain forms of investing may fit into our investment objectives. The great majority of retirement savings is in stocks, but where we want our money will depend a lot on our particular situation, especially how long we have before we will need to withdraw the money.
Stocks Are Riskier Investments, and This Risk Must Be Accounted for Properly
Stocks provide a higher level of return on average than other investments such as bonds or savings, but stocks also involve more risk. Over time, the additional returns have been very good, but this does not mean that we will enjoy very good returns over any given period of time.
If we accept the fact that, over time, stocks are preferable to anything else, and they certainly have shown that they are, the question then becomes whether the amount of time you have is adequate enough.
As a general rule, independent of any particular market considerations that is, stocks are a fairly safe bet with a time horizon of 10 years or more. This does not necessarily mean that we need to have 10 years or more to make stock investing wise, but this would be a reasonable amount of time if we were just ignoring everything else and just using this general rule as our guide.
Inside of this 10-year time frame, we would be required to assess market conditions in such a way that we can determine that the risk involved makes sense for us to hold the stocks, in a bull market for instance. Being in a bear market would instead increase the risk above normal and make it more likely that we should step aside.
Ideally, we would be using both parameters, taking the long-term view when we have enough time to make sense of this and being more attentive to the market when this window of comfort closes. There may not be enough time left to just blindly hold something, but blindly exiting in this case isn’t the only alternative, as we may hold with awareness instead.
Investors often encounter contradictory messages between advice they may read from advisors that may tell them to reduce their stock positions, versus their own advisors who of course prefer them to keep their funds under their management. Funds under management is how advisor performance is measured, so it is not surprising that they generally just tell people to keep holding until they need the money.
To be fair, many advisors will recommend that clients cut back on their stock exposure as they grow old, but even though the recommendation will often involve keeping their funds under management, these recommendations tend to be too aggressive and do not properly account for clients actually managing their risk properly. This can even happen in the midst of a bear market since this is never even a consideration.
The most important part of a good plan here is to make sure that this does not happen, that we do not take on more risk than we should and possibly end up regretting it. If we can’t say with any real confidence what direction our assets will have moved at the time that we need the money, these are the times where need to step back and decide whether the risk is worth it.
The window of reasonable certainty with the price appreciation of stocks has narrowed over the last few decades. How we determine this is to take entries at random points and see how likely the value of our stocks will be higher. We don’t want to look back 50 years or more when we do this though because those were very different times and what’s happened during more recent decades is more reliable.
We don’t want to be thinking that we need to hold something for at least 30 years because we’re using data from back from when trading first started to arrive at this number. We do need to account for some of the more recent bear markets such as the crashes of 2000 and 2008 and see how long it takes to get back into the green, and if we can handle these two big moves, we should be able to handle any reasonable expectation.
Today’s Reasonable Time Horizons for Stocks Are Shorter, But Risk Still Matters
It took us 7 years to recover from the 2000 bear market and 6 years to get back to even from the 2008 one, but these are just two instances and we therefore want to build in a little margin of safety at least should we get one that takes a little longer to recover from.
10 years is therefore a pretty reasonable number and you could take any 10-year period over the last 40 years and make money. Those who feel comfortable taking on a bit more risk than this could even go with a 5-year horizon and be ahead the great majority of times.
Ideally though, with a 5-year window, we’d be keeping our eye on things and perhaps not be willing to hang with a big bear market if one comes, and being long stocks in bear markets isn’t a good idea anyway.
The trick here though is to be able to tell the real bears from the phantom ones. If we pull the trigger when we shouldn’t, we risk missing out on the further move forward, unless we get right back in when we see we were wrong. Still though, investors never want to be trading events that are not significant enough for them to need to worry about, like anything that is happening nowadays in the market for example.
Even the 20% pullback we saw late last year shouldn’t even be much of a concern unless you were very close to needing your money, where having this go on for quite some time may result in some real losses. Aside from that, the real key to understanding this move properly from an investing perspective is to see it as a pullback within a much longer upward trend, which distinguishes it from a pullback of this amount in a market that isn’t rising overall.
In any case, as investors, we really need to make sure that we’re not trading the noise and confine ourselves to moves that actually should be of interest if we decide to seek to time our exits and therefore manage our risk more closely.
Whether we choose to take the reins or just exit based upon a condition external to the market such as how long we have to invest, we still need to pay attention to risk and how these risks may change, whether that be as we approach retirement or due to market conditions changing significantly.
We are still in a long bull market, with the outlook going forward being quite positive in spite of some concerns, so if we still have at least a reasonable time left to invest, this is not the time to get too antsy or worried. Stock markets can always decline, and decline quite a bit, but this is the risk we take whenever we hold them.
These risks must be great enough for us to exit though, and if the risk isn’t great enough and the potential returns still make sense of taking it on, we should not even be considering selling yet. If they are too high though, both overall and in terms of our individual circumstances, this is the time where we need to get out, and need to make sure we do.