How To Handle Stock Market Mayhem (part 2)
In February and again in March, there have been dramatic drops in the stock market and it has made many people nervous. It’s one thing to absorb a drop in your portfolio value if you’re working and accumulating assets. After all, you can tell yourself that (1) you have a long time before retirement so you can be patient, and (2) you’re buying stocks on sale through the purchases you make in your employer savings plan. All well and good, but what if you’re retired and the market takes big dips? What then? The same thinking doesn’t apply because (1) you don’t have a long time before you need the money in your investment accounts and (2) you are probably not making purchases; instead you may be selling stocks.
Ironically, the way to handle stock market shocks if you’re retired is similar to the way to absorb them when you’re working: mindset and asset allocation. The way you apply these methods are different than someone who is working, but it’s still the same two building blocks.
Let’s talk about mindset first. Before you retire and in the transition time for about 18-24 months after you retire, there are a number of mindset shifts that you will need to make in order to have a happy retirement. These include:
- A new self-identity that does not include your work persona
- How you use your time (there is only so much time you can devote to your hobbies).
- The fact that you are taking money out of your long-term savings instead of putting money into your accounts
This last one is key. If you make the jump from accumulating to distribution of your assets and accept the fact that your account balances are going to go down, it makes it easier to see stock market shocks as part of the process. Of course, there is a practical aspect to managing a distribution portfolio as well. The #1 rule in managing a retirement portfolio is to NOT TAKE MONEY OUT WHEN THE PORTFOLIO BALANCE IS IN DECLINE DUE TO STOCK MARKET DECLINES. And the way to make sure you do this is by an effective asset allocation. One that is set up to make sure you have adequate cash and short term bonds to fund your cash needs. Our rule of thumb is to have 5-7 years of cash and short term bonds in a portfolio at all times to ensure a client can look at a stock market drop and think to themselves, “That’s interesting. I wonder what time we’re meeting the Smiths for tennis today?”