"Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." -- Peter Lynch
BY JULIA ANDERSON
Investors who remained in the U.S. stock market after the Covid 19 selloff in March 2020 can be happy, maybe proud of their ride-it-out strategy. Markets more than doubled since a quick 30 percent downturn before making one of the fastest recoveries in history.
Now here in the fall of 2021, investors can celebrate another 20 percent to the upside thanks to rock bottom interest rates, economic stimulus packages including cash pumped into jobless benefits and strong consumer demand for goods and services.
Can this go on? Can markets climb higher?
Headwinds are gathering but traders show no signs of abandoning ship. Analysts with a longer-term outlook expect market growth to slow from what we have experienced in the past 18 months. But no one is saying we are headed for a crash.
But at some point, there must be a correction. It could be triggered by a bump up in interest rates from the Federal Reserve Bank, a return of Covid lockdowns that pushes jobless rates up, continued supply chain choke points that stifle GDP growth or some catastrophe that we’ve not thought of.
That’s why I have devised a plan to protect my portfolio in case of a downturn as the Federal Reserve begins to look at raising rates, as stimulus money dries up and we get a little more back to normal, whatever that might be. We are getting back to normal, right?
Here’s the challenge: How do you prepare for a downturn while continuing to earn dividends and build your nest egg? This largely depends on your age.
Let’s start with those fully retired, those in early retirement and those at 60 near retirement:
Over 60? In the decade of your 60s, things change. You may retire, you may lose a spouse. You may sell your house and move. Likely you will continue to work part-time, but you may start claiming Social Security benefits and/or drawing money out of your retirement tax-deferred nest egg.
Making these moves requires planning. How will you keep growing your nest egg as you make these transitions? The stock market is still your friend offering the best returns over time.
Plenty of spread sheets will show you income curves related to types of investments – stocks, bonds, money market accounts or some combination. Don’t get too conservative. Don’t sit on the sidelines because you are afraid of seeing your nest egg lose value. Your money must keep earning money. Keep most in stocks paying dividends inside your tax-deferred account but have enough in cash so you can sleep at night if there’s sell off.
In your 70s, the IRS will require you to begin withdrawing money from your tax-deferred portfolio. These Required Minimum Distributions or RMDs will be taxed as ordinary income.
Here’s a strategy to anticipate an economic slowdown. Convert enough of your nest egg to cash to cover the Required Minimum Withdrawals for the next 18 to 24 months. Leave the rest in dividend paying stocks. That way, if there’s a sellout, you don’t have to sell anything at a discount. Meanwhile, your quarterly dividend money gets reinvested in more shares of the stocks or mutual funds that you own.
Now for the younger crowd:
If you are age 18 to 30, just keep chucking money into your 401(k) at work or an Individual Retirement Account, Roth IRA or all three. Don’t be bothered by a sell off. All that means is that U.S. stocks are on sale. Your long-term investment money will buy more shares in a mutual fund or individual dividend-paying stock than when markets were up. Count on an average 100-year stock market return of 8 to 10 percent a year. You are a long way from retirement. You will get where you need to go if you stick with the plan.
If you are 30 to 50 years old, do the same as the above-mentioned younger group. The money you are putting into retirement savings is not going anywhere. Make sure that your retirement money is not emergency money. You have that money stashed somewhere else. This is not money squirreled away for the next vacation or to buy a new house.
If interest rates go up, consider putting new cash into a money market fund at 2 percent or more outside of a deferred plan. You want to stay ahead of inflation with long-term investments. Inflation can bite. Saving is important but earning money on your savings is more important.
At 50, retirement begins to loom. Are you on track to have a big enough nest egg at age 65, 70 to live on? You may face an early buyout or a layoff. Do you still want to be in the stock market? Yes, if you are job-secure and can count on working until your mid-60s. If there are clouds on the horizon, you may need to make an early withdrawal from a deferred account. Then some of it should be in cash so you don’t sell during a market sell-off. Withdrawing money from an IRA or 401(k) should be the very last thing you do. There are penalties for that.
Meanwhile, build an emergency outside your deferred accounts with enough cash to pay your bills for a year. That way you can stay in the market with your retirement money through the ups and downs without having to sell something when markets or a stock is down.
Remember: Fear and greed drive markets. Many investors can’t stand the heat of a selloff. They bailout at or near the bottom of a market downturn and then fail to get back in time to take advantage of the eventual turnaround. Investors, especially women, “need help in developing emotional discipline,” says national financial columnist Chuck Jaffee. I agree. But how to do that?
Think about your MONEY PLAN in advance. Remain confident that doing nothing, staying the course IS A PLAN! If markets crater it is NOT the end of the world, the value of your portfolio will recover. History proves it. Have a talk with yourself in advance about how to handle a sell-off.
After a breath-taking 30 percent Covid induced decline in March 2020, the recovery began almost immediately. A year later, the Dow Jones was up 80 percent from 12 months earlier and has been hitting fresh new highs all summer. My sympathies to those investors who bailed out and are now on the sidelines wondering what to do.
What’s ahead? Most experts predict that a sell off is coming after the spectacular 2021 ride to record stock market values. On the plus side, the Fed will likely keep interest rates low in the face of the Delta covid variant. That keeps money in stock markets. The U.S. economy is in better shape that most of the rest of the world. The nation’s labor market is adding jobs. Consumers are consuming. All these indicators point to further increases in stock values if corporate earnings stay positive. Passage of a federal Transportation Bill will help.
On the negative (selloff side) markets may be “over-bought” and need a breather. A slight increase in interest rates could trigger market declines. There could be another unexpected disaster… covid variant, terrorist attack, weather-related difficulty. Supply systems could remain stuck. Computer chip shortages could mean trouble for manufacturers. Unemployment could remain elevated with slowing job recovery. And there’s a certain taste for speculation in markets with the crypto craze, high flying tech stocks and speculative Ponzi-like pressures that are putting younger investors at big risk.
There’s a lot to ponder, to worry about. Don’t ignore these worries, analyze them, and have a plan. Remember: The average annualized rate of return for U.S. stock markets is about 8-10 percent. Embrace that fact but keep some cash on the side.
"Risk comes from not knowing what you're doing." - Warren Buffett, investor.
BY JULIA ANDERSON
My parents trained me by example to manage money and think long-term. Living on a farm, they had me working little jobs (pulling weeds in the bean field) and saving for college when I was 8 years old. As a teenager, 4-H beef projects gave me early “business” experience with the basics of profit and loss, record-keeping and expense management. My seven years of 4-H beef projects paid for college.
A college degree in education and journalism gave me career opportunities that fit my interests.
Investing in dividend-paying stocks was painless. My mother began giving me small amounts of stock (10 shares of IBM) when I was in my 30s. She saw nothing complicated or mysterious about buying stock for the long-term and reinvesting the quarterly dividends. She loved seeing her net worth grow. She was a confident investor.
Early on she taught me the “Miracle of Compound Interest,” earnings from both stock investments and certificates of deposit at the credit union. Growing a long-term nest egg, saving, and investing are a key part of my financial plan. I became a confident investor by sticking to what I understood.
I never passed up free money. I made sure that I saved enough inside my 401(k) plan at work to win the employer matching money. With an eye on the long-term, I picked moderately aggressive investment funds.
I started my own self-managed Individual Retirement Account and separate stock account. I learned by doing. I didn’t wait until retirement to start managing my investments. At retirement, I moved my 401(k) money to an online self-managed brokerage account where management fees are low and there's no charge when I buy or sell something.
I sought out mentors. My mother was the first. She shopped for bargains at the store, was careful with credit cards, looked for the best CD savings rates even if it meant changing banks. She bought shares in companies that she understood (McDonalds). My mentors were themselves confident investors. Money advice came from people who were not selling me something or charging a management fee. For me, it's simple -- Reinvest earnings – dividends or interest. Don't get into something that you don't understand. Check out management fees and commissions.
When I retired, I expected to be in charge of my money. I learned the basics sooner than later so I had the confidence to manage my money and make reasonable trade-offs between risk and financial reward.
I could have planned better for unexpected challenges. I did not expect to divorce at age 60. I lived through it, kept the house, and soldiered on. It has worked out. My advice -- plan for the worst, expect the best. Have your own money. As they say at WIFE.org, "A Man is Not a Financial Plan." A spouse may become seriously ill or die. You may divorce. Meanwhile, you may inherit assets from your mother or aunt. Have a plan for how those assets will be managed. Have a plan for how you would manage on your own.
Look ahead to retirement by knowing what your expenses will be and how much income you will have. (See worksheets on this website). Don’t ignore Social Security as an important income stream in retirement. I claimed benefits at 64. That was too early.
My 80/20 (stocks vs cash) investment strategy has served me well. I continue to trust that the U.S. stock market will over time deliver an annual average return of about 10 percent. I keep management fees low. I don’t try to “time” the market by getting in and out. I don’t panic when markets sell off. The U.S. stock market and the American-based companies it represents with its regulated capitalistic environment will reward those who are patient. I believed that as a kid. I still believe it. I am a confident investor.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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