If there is a significant market decline in the next few years, a client is worried if they will be able to recover financially. How would this decline impact her? Will they have enough money to live, to pay their bills, to maintain their lifestyle?
The question makes sense. It is a common concern. It is worth exploring.
Let’s start by breaking down the concern. “If there is a significant market decline in the next few years…” The reality is that this will happen. We do not know when. We do not know by how much. History teaches us that we cannot accurately predict market declines in advance. And we cannot know the extent of the decline.
The key is that we do know, based on stock market history, that the world’s stock market’s will decline, and decline significantly at least once every 3-5-7 years. So an investor must understand and develop the resiliency that there will be a significant market decline every 5 years or so. It is not an if, but a when.
So if the investor understands that there will be market declines, which will occur, then the next factor to understand is that the market declines will be temporary, not permanent. The stock market declined in 2008-09, but has recovered and gone on to reach much higher levels. Many times the recovery takes only a few years, sometimes it can take longer. Working with an advisor, who can discuss these facts and provide support during market declines, will enable you to have the mental resiliency to live through the declines. We work through scenarios, with dollars and potential declines, to show how a decline would impact you.
“Will we have enough time to recover?” This is a great issue, and where planning and perspective are vital. On the one hand, a woman who is 70 is concerned about the next stock market decline, let’s say in the next 2-5 years. But she is also concerned about whether she will have enough money for medical or nursing home care that may be necessary 15 or 20 years in the future, when she is 85 or 90, or even older. We must plan and work together to handle both concerns.
The answers to these questions are obviously personal, based on how much money each person or couple has, their health and other factors. In general, the answer is that a reasonable allocation to stocks is necessary, so that the portfolio can continue to have the opportunity to grow over the long-term. A 70 year individual or couple may become more concerned about not being able to recover from a near-term decline, but their life expectancy is almost 20 years (and keep in mind that average life expectancies mean 1/2 of the population will live longer than the life expectancy). They need their investment portfolio to be managed with a 20 or more year time perspective, not as if they have a 3-5 year time perspective.
It usually takes some good discussions, over a period of time, to help provide the confidence and mental resiliency for these varied time perspectives. As we develop a personalized asset allocation plan for clients, these discussions are important so clients realize that stock market declines are normal and temporary, in order to receive the long term benefits they want to achieve.