Last month, Billeaud Capital Management’s Erin McMenemon wrote a post on the recent yield curve inversion and what it might mean for the economy, financial markets and your portfolio. The major takeaway from Erin’s article is that a yield curve inversion is one sign of a possible recession (but please note – an inverted yield curve does not guarantee a recession. It is simply one of the many indicators we look at, suggesting that we are late in the business cycle).
But what if the economy is headed for a recession? What does this mean for those looking to retire soon?
Some investors are looking back to 2008, where many retirement plans were stymied because of financial crisis that arose. Despite the current news headlines that reintroduce those painful memories, consider these tips to keep your retirement goals in check and suppress your pre-recession jitters:
Diversify! Diversify! Diversify!
It may sound like Investing 101 but diversifying your portfolio, such as we do for our clients at BCM, can be the easiest way to reduce the severity of a severe market loss in retirement. When investors move closer to retirement, a diversified portfolio with safer assets such as bonds and cash should be considered in order to reduce portfolio risk and create a cushion during market downturns. For example, a 100% stock portfolio might have experienced a 37% loss in 2008, whereas a 60% Stock/40% Bond portfolio (standard, balanced retirement portfolio) experienced a 20% loss., and less in the BCM diversified portfolios. In retirement accounts, a quick click of the mouse to reallocate your portfolio can make a large difference.
Stress Test Your Portfolio: Monte Carlo Analysis
There are thousands of elements that factor into the performance of the financial markets in any given second. How does one plan for that over a 30-year retirement period? One solution is to “stress-test” your portfolio with a Monte Carlo Analysis. Monte Carlo Analysis is a tool used in many industries to measure the probabilities of successfully reaching an outcome when you throw in different variables. For retirement planning, the analysis measures the probability of meeting your retirement objectives under various market conditions. This considers the full spectrum of return possibilities (favorable, unfavorable, apocalyptic, providential climates) and determines the probabilities that your portfolio will survive in those scenarios. The results can be reassuring; boosting your confidence for meeting retirement goals, even in turbulent markets.
Test for a Financial Crisis…Today
Taking the Monte Carlo analyses a step further, another exercise to consider is seeing how your portfolio would fare if you were to retire in the same year as a market crisis. Would your portfolio meet your retirement needs if this were to happen? At BCM, we evaluate your portfolio’s durability by incorporating 2008 returns in your first year of retirement. This scenario can typically be viewed as one of the more disadvantageous situations when one begins retirement. This rear-view-mirror test gives you an opportunity to prepare for some of the biggest threats to any retirement plan.
Avoid the Noise
One of the toughest obstacles investors face is noise – the ample, often distressing flood of market information. Pre-Retirees and Retirees are particularly vulnerable to this because the stakes are much higher. Those in or close to retirement are at higher risk when making a knee-jerk reaction if we experience a market downturn. The result creates a magnified effect to your portfolio (buying high/selling low AND taking account withdrawals) that can be difficult to recover from and ultimately carve into the life of your portfolio. Retirement investors fare better when they remain focused on their retirement plan, no matter what the talking heads say.
It is certainly understandable for investors to be anxious, but I am here to tell you there is something you can do about it. Instead of sitting back, I encourage you all to take the measures above into consideration which will prepare you for anything the markets throw at you and keep the noise at bay…including the jittery little voice that lives in us all.
If you are not a client of BCM and are interested in learning how to keep your sanity and prepare your portfolio for a downturn, email me at firstname.lastname@example.org.
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About the Author
Montgomery Gossen joined Billeaud Capital Management in 2016 as an Investment Adviser Representative. Montgomery previously worked for Advent Software, a financial reporting software firm based in Jacksonville, FL where he served several roles assisting financial advisory firms across the country. Montgomery earned a B.S. in Agricultural Business from Louisiana State University and is a Certified Financial Planner™…. Read more.