Some people live in fear of unusually deep market declines, and it threatens their financial success. This is certainly not a prediction from me- but in years with a lot of headline noise it can be crucial to recommit to the timeless truths of investing and planning.
Part of the reason is that most people only know the stories of those who made major mistakes. They remember the investor who sold everything near the bottom. They remember the retiree who panicked. They remember the person who concentrated their wealth in a handful of stocks or speculative investments.
They rarely hear about the people who simply followed a diversified financial plan.
I can honestly say that I don't recall meeting retirees who faithfully followed a reasonable withdrawal strategy, maintained adequate cash reserves, stayed diversified, and failed because of the 2008 financial crisis.
Many who made wrong decisions are determined not to repeat their mistakes; those that stayed true to their plan grew in confidence. Those who weren’t investing yet may have to make such a consequential choice in the future.
Yet, many are skeptical; people still believe that retirees "lost everything."
The reality was very different.
Consider a retiree who began October 2008 with:
· $1,000,000 portfolio
· 60% stocks ($600,000)
· 40% bonds and cash ($400,000)
· $40,000 annual withdrawals supplementing social security/ pension income
· Regular portfolio rebalancing
Within months, the stock portion of the portfolio fell dramatically as the financial crisis intensified. By early 2009, the stock allocation had fallen to roughly $340,000.
This is the part everyone remembers.
What many people forget is what happened next.
The retiree still had approximately $400,000 in bonds and cash. Withdrawals could continue without selling stocks at depressed prices. Rebalancing gradually shifted money from bonds into stocks while prices were low.
Over the following decade, the stock allocation recovered, surpassed its original value, and continued compounding.
By 2018:
· The retiree had withdrawn approximately $400,000 for living expenses.
· The stock allocation alone had recovered from roughly $340,000 to more than $1.1 million.
· The overall portfolio remained substantially intact despite beginning retirement during one of the worst market environments in modern history.
This doesn't mean bear markets aren't painful.
It doesn't mean every retirement plan succeeds.
The lesson was definitely not to avoid investing altogether, or rely on predictions to anticipate bad news.
It simply demonstrates an important truth:
The financial crisis was devastating for investors who abandoned their plans.
Investors who followed their plan made it through largely intact.
The lesson is not that market declines don't matter.
The lesson is that diversification, cash reserves, and disciplined rebalancing were specifically designed for periods like 2008.
And they worked.
*Note: I've written several more posts recently about the most recurring issues I'm seeing and hearing from investors. Be sure to click the "coaching blog" tab to see more. Forward to someone who needs it!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Western Wealth Management LLC , a registered investment advisor. Western Wealth Management LLC and Kennebec Wealth Management LLC are separate entities from LPL Financial.