Retirees, do you have an Exit Strategy when the Market goes down?
Pundits across the board will tell you as all of the stock exchanges around the globe are sliding downward, if you have a plan, stick with your plan. Does your plan contain an exit strategy? Many advisers will put together a plan during your accumulation phase that is based on the core financial principle that it is truly effective for the overall performance of a portfolio that there is a constant inflow of deposited money, especially when the market performance is going down. You don’t have to look any further than your own retirement plan where you made consistent periodic payments into your portfolio. As markets devalued, that simply meant that you were able to buy more shares of your mutual funds with the same amount of money and when the market goes back up, your portfolio will have that much more to realize the upswing of the market.
As you approach retirement, if you are not there already, your needs change from accumulation to distribution because you can’t count on consistent payments into your portfolio to buy on the downside. So one question comes to mind. Does the success of your retirement depend on the success of the market? If this is the case, what is your exit strategy you have in place? I am the father of 5 kids and we are that family which practices a fire drill. To save lives, practice your fire drill. How to get out of the house, where to meet that is safe and then when is it safe to go back in? Your exit strategy should contain the same principles you have with your adviser. If your portfolio, as a whole depreciates to certain predetermined limit within an agreed upon time frame then its automatic that you turn your assets into something else (safe area to collect and count your family members). All of this takes time, knowledge and expertise to find just how much there is to bear in your portfolio before it gets to a point where the downside of the market effects your decisions in the future.
As we continue with our fire escape story, there are certain things you do as a father to keep your family safe. You make sure that the fire alarms in the house are in good working order; you make sure that the fire extinguishers are inspected and are accessible; you make sure that all window ladders are functioning; and finally, everyone knows what to do (without thinking about it) in case of emergency. But the main thing to do, as a father, is to create a household or portfolio that cannot get to that point in the first place. If your success throughout retirement is predicated on the success of the market, even marginally you could have set yourself and your family up for disaster, especially without an exit plan. So as your portfolio is going down and you have to take distributions now you are going to counteract all of the risk and appreciation that got you a comfortable retirement.
Have you heard of the “Financial 2 Step”? This is a tried and true financial planning concept that shows two portfolios where one goes along with the market for 20 years at an ‘average’ rate of return of 10%. Now the math goes like this: 1st year the portfolio goes up 10%; the 2nd year the portfolio goes up 10%; but the 3rd year the portfolio goes down 10%. For example: You start with $10,000. The first year it is at $11,000, the second it is at $12,100 but the 3rd year it is now at $10,890. Now the second portfolio is built different where it has an exit strategy to be out of the market when it goes down 20% and back in when it goes up, so where do we stand? First year; $10,800, Second Year; $11,664 and the Third year, again we are at $11,664… so what happens after 20 years? Our first portfolio with all of the ups and downs of the market would be worth $20,181 while portfolio two with the exit strategy is worth $29,372.
Last question, when is the last time you reviewed your exit strategy? If you are nearing or already in the distribution phase of your financial life, it is imperative that this plan is created, implemented and managed. Review how much correlation there is to the market with your portfolio by understanding your allocation in defensive, blue chip and growth stocks that solely depend on the number of buyers versus sellers and the strength of dollar for its value. You need empirical information regarding the types of income generating assets and how governments influence pricing. But above all else, you need to control the foundation of your portfolio if it is one large asset where you ‘feed off’ the entire capital appreciation and interest of the entire portfolio or if you have created specific subaccounts that have purpose of short and long term needs.
By laying out a strategic income plan, weathering market storms, changes in tax laws and economic policies will have little if no effect on the success of your retirement. Sit down with your adviser to create your personal exit plan to secure your family’s financial success.
Source by Charles E Stevens