Third Quarter 2015 – Planning For Volatility

It can be unsettling when our portfolio values are damaged by a market correction as experienced this last quarter, especially when this volatility has not been seen for four years. Research studies indicate that a loss has more than twice the emotional response than an equal gain for the average person.1 Consequently, our office tends to get more client input in down markets than in rising markets. Guidance through tough times is one of our purposes.

We often write and discuss the inevitable corrections ahead, but investors are seldom prepared for the trauma of losing values. While the doomsayers come out of the woodwork in these times to sell their secret strategies promising protection from the coming collapse, our first reaction is to take action. Do something! We can’t just sit here, or can we? I think most experts will tell you to take a deep breath and do nothing at all. As long as you are investing within a strategic plan that is consistent with your tolerance and lifestyle, then you need to consider the “What? Me worry?” attitude and maybe look at your account values less often.

We tend to think that an investment portfolio built up over decades with savings, employer matching and market returns is all ours. In reality, after a long rally, an investor who is spending within his means has built up some cushion for the next correction. Fifteen years ago, with stocks at highs, I warned in our December 1999 newsletter about counting money as ours and spending the excess gains as if it was free money. “You can’t eat a bubble” or “Don’t spend your fluff,” I wrote.   In 2015 we are at fair values in our opinion, not overvalued as we believed in 1999, but the principles still hold after six years of recovery from the financial crisis. Values are there to help you through the next valley, so don’t count them.

Nearly forty years ago Kenny Rogers released the song “The Gambler.” Most of us could recite its chorus which ends with “You never count your money while you’re sittin’ at the table. There’ll be time enough for countin’, when the dealin’s done.” In investing, retirees are at the table for life and the dealin’ is going on every day. Your heirs will do the countin’.

SOSModelIn retirement, there are only two things over which you have total control: spending and portfolio risk. We help you develop a retirement plan that you believe is consistent with the risk you can tolerate and the lifestyle you seek. We test the plan annually, simulating our estimates of the market volatility as shown in SOS Modeling chart.

When you see this volatility analysis, don’t overlook the many lines below the average. These are the possibilities that might occur if the markets are weak in the early years of the plan. When these markets take place, we need to redraw the plan and insure there are no spending or strategy changes needed. A plan can give us peace within the turmoil, so if you are feeling a bit queasy or it has been more than a year since an update, give us a call to update your plan.

201509 Barometer


1The Psychology of Loss – Usabilla Blog July 19, 2012 by Neal Cole





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