Your Money This Week

In your money this week, we’re looking at the mini sell-off we had in markets, recapping the current environment, and answering a FAQ about whether getting older means you should change your investment objective to become more conservative.

A Mini-Correction

The S&P 500 peaked on July 16th. Between then and August 5th it went down about 8.5%, mostly due to a three day 6% drop that ended Monday. It’s currently crawling its way back up.

Market drops like this are fuel for the financial content machine. By Monday, we were getting quality reminders to be patient, blatant book talking, made-up narratives, and panicky victory laps.

Quality Reminder

Investor performance matters more than investment performance. An 8% drop is the time to be sharing with investors the points we at Heritage Financial emailed to clients Monday evening.

1. It’s important to place this volatility in perspective: “Stocks were up as much as 15% this year before this downturn. That’s well above an ‘average’ return for stocks in a calendar year. Remember, stocks experience an intra-year decline of about 14% on average in any given year. That’s just ‘typical’ market volatility.”
2. Diversification is your friend: “Just as a small handful of stocks (the Magnificent 7) were responsible for much of the positive performance of stocks over the last few years, those same stocks are leading the downturn today (along with other risk assets like crypto currency). Our commitment to global diversification, including small and mid-cap stocks, means we will miss out on extreme market movements in either direction. While this may feel frustrating at times during strong markets, it’s a clear benefit during falling markets.”
3. We’re here to keep you on track: One of the main reasons clients hire advisors is for us to do the worrying for you and manage your portfolio during difficult times. “Remember, markets go up more than they go down. We cannot stress enough the importance of staying invested during this volatility. Most of the best trading days have historically occurred during the depths of a bear market. Missing just a handful of the best trading days can cost long-term investors immensely.”

As I said, we have drops that are bigger than this on average every year. They can rattle investors nevertheless.

Who do you want to be hearing from in times like this?

People who want to educate, put things in perspective, and explain why we’re staying the course, or overnight Yen/carry trade experts who a week ago were instant Sahm rule masters, book talkers who use any market news to shill product, permabears taking a victory lap, or panicked Fed bashers?

The Current Environment

In our August markets edition of the Wealthy Behavior podcast, we recapped the market environment coming out of July. You can listen to the full episode here and wherever you get your podcasts.

We discussed:

• How June’s deflation changed the markets and expectations for rate cuts
• The rotation trade from big tech into small cap and value and why valuations may have been just as big a catalyst as anything else
• Whether small caps really do better in lower interest rate environments
• Bond portfolios doing better
• Mortgage rates coming down
• Update on international markets

Changing Your Portfolio with Age

A FAQ we get is should my asset allocation become more conservative as I get older? We also discussed this on the podcast. Here’s the edited transcript.

This is a great question, and that’s what target date funds do. They assume that you should get more conservative as you get older. But it depends on your situation, and it’s not always the right decision based on your goals.

A main goal to consider is the terminal value goal. How much money do you want to leave behind after you pass? For some people, it’s nothing, while others have a goal for multi-generational wealth. Most people are probably somewhere in between, meaning they’d like to leave something behind for their family and don’t want the funeral home check to bounce.

The longer you want the money to last, the more stock market risk you should be taking assuming your withdrawal rate is healthy. And, really, the healthier your plan is, the more risk it allows you to take. A strong plan with a low withdrawal rate allows you to take a good amount of risk because major market declines aren’t going to put your portfolio’s ability to make those withdrawals at risk.

The less interested you are in leaving a legacy allows room for more bonds if you’re not interested in dealing with stock market volatility. Don’t reduce risk too much because you need to keep up with inflation and allow for healthy portfolio withdrawals, but willingness to take risk is a factor and if you want a less volatile ride, that’s going to be considered.

Scenario analysis helps. We we have great software, and you can see what the different trade-offs are between approaches.

If you have a higher withdrawal rate, there’s less room for error, less room for heightened risk, and contrary to what some people think, you need to be conservatively invested because a major market decline in an aggressive portfolio facing large withdrawals leads to permanent portfolio loss.

So, directionally age isn’t the predominant factor. It’s the withdrawal rate from your portfolio, how long you want it to last, and what rate of return you need to target.