Financial Success Through Planning And Discipline

Financial Success Through Planning And Discipline

A client of mine works for UPS, and is about to retire next week. He emailed me today, and here is our exchange:

Rob: With recent events going on with Wall Street, should there be any concern with me and/or my 401k? Of course this is starting to happen when I’m ready to retire. Any input would be greatly appreciated.

Me: No need to be concerned. We developed a high-quality retirement income plan to help us be prepared for times like this. The plan is guiding us, not the whims of the market or the media hype.  Remember our conversation – the retirement income plan we designed plus your ability to work part time work will pay the bills for years to come. There is no need to touch the investment assets for 5+ years. Keep a long term perspective with your investments, don’t get spooked by the recent news – today’s news will have little effect on your long term success as an investor.

Rob: Thanks for turning off the sweat glands!

To help keep things in perspective, here are some headlines you won’t see in tomorrow’s paper:

  • The S&P 500 has posted a positive total return in each of the past 15 month
  • It’s impossible to predict short-term market moves
  • A pullback in stocks is normal and could be healthy
  • Higher volatility is healthy
  • The bias for global stocks remains upward
  • Don’t Panic, Prepare and Plan

And regardless of the headline, here is the story that should be told: (but it’s a boring story that won’t create fear or greed, so it’s unlikely that anyone will publish it!)

Don’t be scared, and don’t be impulsive. Be disciplined no matter what the market environment. Keep saving and investing according to your long-term plan.

US stocks, as represented by the S&P 500 Index, have not experienced a drop of 5% or more in the last two years. This is not typical. On average, a market decline of 5% (or more) happens three times a year. On average, a market decline of 10% (or more) happens once a year.

Selling stocks at the wrong time can significantly damage long-term returns. For example, the S&P 500 had an average annual return of 7.7% from 1997 to 2016. (Keep in mind that at 7.2%, your money doubles every 10 years). An investor who missed the best 40 days during that span would have suffered a 2.4% annual loss.

For my clients are that are currently taking income, we have one to two years of living expenses in liquid assets such as high-quality short-term bonds or guaranteed fixed rate investments. This is significantly higher than the typical three- to six-month “emergency cash fund” suggested in basic financial planning courses. But this approach provides the necessary liquidity to meet short-term liabilities and also helps provide the mental toughness to withstand the inherent volatility of investments earmarked for future goals.

Given that the average peak-to-recovery duration for pullbacks of 10% or more is approximately 21 months, setting aside this amount seems reasonable. This approach can helps provide discipline to avoid making knee-jerk reactions to investments during periods of increased volatility.

The global economic environment is accelerating, with the International Monetary Fund recently upgrading its expectations for global growth. US growth also appears to be improving (after all, the jobs report that triggered the jitters was a positive one, showing job gains above expectations). The Atlanta Fed GDP Now Model recently forecasted 5.4% GDP growth in the first quarter of 2018; while this seems too high, in my view, it certainly suggests an improving growth environment. Earnings season has been positive as well, and earnings are expected to improve this year.

I am thankful for our relationship, and find it personally and professionally rewarding to help you and your loved ones make smart decisions with your finances. Should you have any questions, or like to discuss any changes to your plan, do not hesitate to call me. I look forward to our next conversation.


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