What a week. The S&P 500 was incredibly volatile last week, seesawing back and forth before ending the week on a high note. Last week is a prime example of why it’s hard to time the market. And as gut-wrenching as watching the drops last week was, the S&P 500 is up over 4% from this time a year ago. So if last April you were happy with your investments, chances are, you’re ahead of last year.
I recently said that some of the best advice I can give right now is to take a deep breath and just not look at your accounts. I had some pushback on that, as someone said that’s not easy when you have to pay for college right now, or are in retirement, and are spending from your investments.
Investing in stocks is a long-term proposition. If you are using the money within a year or two, I would argue it should not be in stocks at all. For example, the Maryland 529 plan offers target date investment options. You pick a portfolio based on when you expect to use the money, and the fund changes over time, going from mostly stocks when your child is young, and moving more and more into bonds as your child ages. You do sacrifice some potential growth. But the 2027 Portfolio is currently 80% in bonds, and should not see the same wild swings we’ve experienced in the market over the last few weeks.
When you’re saving for retirement, market downturns are a great thing. If I’m investing $500 a month, when stock prices fall, I’m buying more shares of stock for my $500. In retirement, when I’m selling stock to create income, those market downturns mean that I have to sell more shares of stock to create the same income.
Assuming you don’t have unlimited wealth and need to use your investments to provide income in retirement, there are two options to help mitigate market downturns. The first is an annuity. An annuity is an insurance product that liquidates an estate – it’s the opposite of life insurance. The investor gives their money to an insurance company in exchange for the promise of a monthly check that they can’t outlive. Annuities can be a source of security and guaranteed income; the guarantee is backed by the claims-paying ability of the insurance company, not the stock market.
There are pros and cons for annuities. They are not right for everyone, and they can be expensive. But it can be a viable option for a portion of your retirement assets that provides security and peace of mind.
The other option is a bucket strategy. Divide your assets into three parts: a bucket of more conservative investments designed to provide income for one to three years; a bucket invested for 3 to 7 years, considered a “Growth & Income portfolio”, and an aggressive bucket for future needs. Every year or two, rebalance between the buckets. This allows you to take a deep breath, and just not look at your investments, in a market downturn. Even in retirement.
Your action item this week is to refresh your LinkedIn profile. If we do head into a recession, you’ll be ahead of the game.
Check out our website at covingtonalsina.com, or our Facebook page, for more information and to see our other upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.