What Goes Up Must Come Down: How Retirees Can Prep for Potential Market Downturn
Change is the only constant when it comes to finances. While the market has shown positive trends for the last nine years, a downturn is inevitable. Taking steps to help protect investments now is the key to avoiding potential losses later.
Published: Thursday, January 11th 2018, COCONUT CREEK, FL
If there is one constant in the financial world it is change. As monies change hands and markets change directions, it’s important to plan and be prepared for all the twists and turns inherent in investing. The stock market has been on an upswing for the past nine years, but will this continue? And what will happen to those whose money is invested in the market if it doesn’t?
“People have been lulled into complacency thinking the market will continue the way it has been without planning for a potential downturn,” says Craig Kirsner, MBA, president of Stuart Estate Planning Wealth Advisors, a Coconut Creek, FL-based full service financial planning firm. “Historically, there’s been a recession every five to seven years. While it’s great that that hasn’t happened yet in this current cycle, the key word here is yet. Eventually, there must be a downturn so it’s crucial to plan for it before it happens.”
One way in which retirees and pre-retirees can plan is to get an accurate assessment of how much risk they are currently taking with their money and if any of that risk should be decreased. What is the best way to assess risk? Kirsner notes that it isn’t enough to rely on someone else’s meanings of terms like “conservative” or “risky” because they can mean different things to different people. “Stockbrokers live in the world of risk so what may be ‘conservative’ to them isn’t necessarily what’s conservative to a retiree,” he adds.
A step toward helping protect one’s assets could be through a portfolio risk analysis to help provide a firmer understanding of where one’s assets currently sit and the risk to which they are actually exposed. “My main concern for retirees is that they often have much more risk than they want or need,” says Kirsner. “Hope is not a retirement plan and hoping that things will continue as they are defies historical trends. Preparation is absolutely essential.”
When quantifying and comparing one’s risk tolerance, retirees often do find that they’re taking greater chances with their money than they thought. “Knowing is more than half the battle,” says Kirsner. “In the event a retiree does find that they are taking greater risk than they are comfortable with, one should consider financial vehicles that are designed for safety and income versus growth.” But the time to do that, he adds, is before any major shift in the market.
Thinking of some of the ways to potentially avoid loss and help protect one’s hard-earned assets, working with a financial professional held to the fiduciary standard can be a large step in the right direction. Financial professionals held to the fiduciary standard are required by law to act in the best interest of their clients, which is an important safeguard for consumers.
Kirsner notes, for example, that based on real market gains, an individual would have to gain back 43% to break even from a 30% loss in their holdings, and a whopping 100% to break even from a 50% loss in assets. “The greater the percentage of loss, the more exaggerated or significant the percentage gain one would have to have just to get back to where they began,” he cautions. As such, it is helpful to see potential loss in terms of what it would take to recover, and to take that into consideration when building a portfolio.
There’s no form of investment that doesn’t put money at some level of risk, but understanding one’s level of risk tolerance, aligning one’s financial vehicles with their risk level, understanding risk-reward analysis, and ensuring that one’s financial professionals are held to the fiduciary standard, binding them to act in one’s best interest are all steps to consider when working toward lowering risk and helping protect one’s retirement capital. While no one can predict when and if a market shift will occur, it’s certain that one will and when it comes to a lifetime of earnings, it is always better to be safe than sorry.