Let's start here, don’t panic.
If you view the causes of the recent stock market gyrations from a financial planning prospective, they’re not nearly as important as this fundamental truth: stock market corrections, crashes and prolonged contractions are nothing new. They’ve always happened and are bound to continue. This time, most commentators are attributing the contraction to a virus, compounded by a fight between foreign oil producers and maybe some other factors too.
Markets have cycles -- expansion, peak, contraction and trough. That’s how it goes and I believe it will continue, as long as people trade securities.
The moral is that the downturn should come as no surprise to any professional and certainly not to any well-informed client.
When I hear people talk about how much money they lost during the 2008 crash, I want to say to them there’s a chance you sold some or all of your holdings. That decision locked-in the losses.
Sadly, the evidence that a market cycle has ended is most easily recognized well after the market has moved into the new cycle and the losses you’ve secured through a panic sale will be difficult to re-coup.
Typically, the most vulnerable to extended contractions are people who are about to retire, or have recently retired. They’re subject to what’s called, sequence-of-return risk. What that means is this, once you start to derive income from your portfolio, if markets are declining it can shrink the amount of time your portfolio will last.
Any well written financial plan should include strategies for the nearly and newly retired that can help shield those people from the full effects of the risk. The result – a potentially calm retiree, who knows that there’s an off-set in place to mitigate that nasty sequence-of-return problem.