By Scott Roark, MBA, PhD | December 6, 2019

Good discipline in investing is important in the years leading up to retirement – the accumulation phase of retirement planning.  It is important not to get too carried away if the market is going well by thinking stocks will move inexorably up.  Since March 2009, it feels like that has been the case and there are a number of investors who have come of age in the current bull market and all they know is up, up, up (interrupted briefly by small dips on the way to the next high).  But at the same time, investors can’t get carried away if the market has a correction by thinking here comes a repeat of 2008.  Re-balancing your portfolio – and having a balance of perspective with that – is important.

That is no less true in the retirement years – the spending phase.  It is just as easy to get carried away in either direction – either euphoric expectations of permanently rising markets or a melancholic belief that the next recession is just around the corner.  Either perspective can be dangerous and lead to investing behaviors that don’t serve retirement well.  Being too aggressive in a portfolio allocation can cause mayhem – especially if a correction like the one in late 2018 washes away 19% of the market value of stocks.  But being too cautious can also limit retirement spending.  In many cases, retirement will last 20-30 years or more and the “go-go” phase of retirement can last from 8-20 years or more depending on when retirement happens.

A commonly used tool to help smooth the ride, both in the accumulation phase and the draw-down phase of retirement, is re-balancing your portfolio regularly.  This act of selling assets and asset classes that have increased in value and buying assets and asset classes that have lagged can help a portfolio over the long term meet the goals that an investor has.  A disciplined approach to re-balancing your portfolio is a nice counterbalance to the temptation to engage in market timing that hurts so many individual investors.  Study after study shows the futility of market timing – where investors jump in because they think things are about to take off or sit on the sideline waiting for the next big drop.

I recently came across a podcast (not the Retirement and IRA Show ®) from 2017 where investors were fretting about a market top and the high probability of a correction in the near future.  Going back and looking at what has happened since the March 2017 podcast reveals some big missed opportunities:  the S&P has gone from around 2,350 to around 2,950 as I write this.  That’s a 25%+ increase and doesn’t include an additional 5% or so in dividend yield.  Clearly, someone who thought the market was too high in March 2017 would be leery of buying today.

Now I should include a quick comment to assure any readers that I understand that the market did not move in a straight line up over the past 2 ½ years.  There were clearly bumps along the way, including a rather disconcerting plummet in the fall of 2018.  But an investor with a longer horizon (even someone in retirement) doesn’t have to sweat these changes too much if there are a few things that are true about their portfolio:

  1. They have an appropriate balance in their portfolio of fixed income investments, equity investments and principal protected assets. The worst thing for a retired investor to face is a big hit from sequence of return risk where they need to liquidate investments for current expenses and those investments have taken a large drop in value.  Having a diversified portfolio means that an investor can liquidate some holdings that haven’t experienced a drop to fund expenditures.
  2. They have re-balanced regularly – selling winners along the way and buying more of the laggard. In a roaring bull market, that means regularly paring back the exposure to the volatile stock market and picking up more fixed income securities.
  3. They have a buffer asset – perhaps equal to 1-2 years of expenses. The presence of an asset that is liquid and principal protected that can cover expenses over a 12-24 month horizon should give a lot of security to an investor and allow them to stay the course, stay invested and not try to time the market.  If they’ve gone a step further and bucketed for a longer period of time (6-10 years), there is no good reason to worry about a market drop and no real benefit to trying to time the market.  While the most recent drop in the market in the fall of 2018 just took a few months to turn around, even the gut-wrenching fall of the great recession was largely recovered in 3 ½ years (from a high Oct 2007, the S&P recovered to within 10% of its high by Feb 2011) and was fully recovered in 5 ½ years – by Feb 2013.

In a future article, I will look at each of our Convenience Portfolios and examine how they performed over various time frames for a retiree who stuck with the portfolio, re-balanced regularly (every six months) and drew down money.  The examples will show that sticking with a portfolio, staying invested and regularly re-balancing your portfolio goes a long way towards reaching goals in a portfolio.