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Financial Planning

Show Me The Money: Two Rules For Your Retirement Nest Egg

There are two rules that we talk about with every prospect and client when investing and starting a financial plan.

  1. First rule, don’t lose the money. 
  1. Second rule, when I’m retired send me as much money as possible from my account earnings every month, so I can live an amazing life…but don’t ever forget rule number 1! 

When you think about it, these two rules conflict. If we stay in cash and CDs, no money will be lost, yet not much interest or return will be gained and inflation will eat away at our buying power more and more each year.  This will make it hard to accumulate much money every month to live on for the rest of your life.  If we invest too aggressively in stocks and distribute too much money from your investments to meet your retirement lifestyle, there is a chance of running out of money and depleting your principal in down markets. So how do we do this in both good and bad times? 

As financial mentors, we are here to listen and also explain the planning and investment process and how we’ve helped investors lead amazing lives for decades! This may be a bit elementary, yet the goal of this article is to refrain from using stock market jargon such as asset allocation, non-correlating assets, indexes, sectors, and styles. If we use any of these words, feel free to call us out.
 
If you are retiredwe have some bonds and cash to take care of your income needs as you make withdrawals through-out the year. Think of it like receiving a paycheck from your account. Bonds go up when stocks go down. When markets fall and we enter corrections and bear markets, we’ll use this part of your account to continue to meet your cash flow needs in life.  That way we don’t have to sell your stocks in a down market. As the stock markets recover over the months ahead, the account recovers, your stocks go back up and we replenish bonds and cash over time.  Rinse, wash and repeat as markets ebb and flow through these natural cycles.
 
If you are not retired, we have some bonds and cash to help offset these downturns in stocks. Bonds go up when stocks go down. Stocks help grow your account over time and bonds and cash help reduce risk and downside in corrections and bear markets. Having balance helps you not make an emotional decision and sell at the wrong time. Having stocks, bonds and cash lessens the emotional pain and keeps you invested for the long-term. This also presents an opportunity to use some of your cash and buy more stocks at market lows and reap the rewards of stock growth as a long term investor.

Emotional market timing doesn’t work. We are in this together for the long-term, and no one knows what the markets will do tomorrow. Control what you can from your plan – your risk, expenses, and financial goals.

There was a recent study completed by the Capital Group. The study states that since 1950, the U.S. has spent 15% of all months in a bear market or recession, while 85% of all months are in expansionary periods of economic growth. Those are pretty good odds! In the past we have talked to our investors about this topic in terms of previous history suggesting that 7 out of 10 years, markets go up. The number has now improved with this study, and long-term investors continue to win the retirement game!

We are here to talk through these market cycles. We’ve been at this for a long time. Instead of selling stocks in down markets, we instead talk with our investors to help them better understand their accounts. Once you are more cognizant about this process, it becomes much easier to stay on track with your financial plan. 
 
Below are just a few of the blogs you’ll find on our website, all short and quick reads. We have written these to help everyone make great decisions and have a nest egg that lasts a lifetime.

  1. Written 11/21/2019, The Price of Timing the Market: To succeed with investing, the trick isn’t trying to predict the future. It’s knowing how to handle the uncertainty of the future. Just as any good sailor will tell you: The skill isn’t in predicting whether next week will bring sun, rain, wind, or storms. The skill comes from knowing how to adjust your sails. Read the full article – https://www.wealthanalytics.com/tip-1-from-tea-leaves-to-talking-heads-the-price-of-timing-the-market/
     
  2. Written 5/24/2019, Your (Mis)Behavior Can Break the Bank: Investors emotions cause them to sell in the bad times, and then miss the upswing of the big recovery.  By missing out on those big up days, you lose out on that compounding and growing over many years to come. See attached chart and full blog – https://www.wealthanalytics.com/your-misbehavior-can-break-the-bank/
     
  3. Written 1/4/2019, Staying the Course: Volatility may lead many investors to move money out of the market and “sit on the sidelines” until things calm down.  Although this approach may appear to solve the problem, it creates several others. Read the full blog – https://www.wealthanalytics.com/staying-the-course/
     
  4. Written 12/6/2018, Market Volatility Happens:  A reminder of what happened in late 2018, when Bear Market territory was reached briefly around the concerns of China tariffs, the mid-term elections, and the expectation of inflation and higher rates. Blog – https://www.wealthanalytics.com/market-volatility-happens/
     
  5. Written 10/24/2018, Pullbacks, Corrections, and Bear Markets – What’s the Difference: We’ve highlighted this piece many times, to help our clients understand the differences. Right now as we write this newsletter, we are in Bear Market territory. Remember that this happened in 2018 from November 8th to December 24th (market dropped 20%), and it then took 6 months to recover and move onto new highs. Bear Markets on average can take up to a year for recovery, yet read more about the differences here – https://www.wealthanalytics.com/pullbacks-corrections-bear-markets-whats-difference/
     
  6. Written 12/6/2016, Statement Shock – Perception Risk: Behavior finance and why investors follow the herd at the wrong times. https://www.investopedia.com/terms/b/behavioralfinance.asp 
    and read our full blog – https://www.wealthanalytics.com/statement-shock-perception-risk/

A good financial mentor will educate, keep you on track, has a process, and is an advocate for your financial goals. We are ready to review your investments and financial plan every day, every month and for many years to come.

Sources:

https://www.capitalgroup.com/advisor/insights/articles/guide-to-recessions.html

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