Strategies for recovering from market downturns in retirement

This article from T. Rowe Price provides some examples of prudent and not so prudent strategies for recovering from a severe market downturn in retirement. The study cited in this article once again illustrates how making wholesale portfolio changes during such a time can be the very worst idea, while keeping the focus on reducing portfolio withdrawal rates is optimal.

The only thing I would add is this: Because not everybody can significantly reduce their living expenses during a market downturn, although most can do so more than they think, this is yet another reason why it is so important not to enter retirement undersaved or without a comfortable level of emergency cash reserves. To do otherwise is a big gamble.

Is rampant inflation an upcoming problem for the US?

I am a buy and hold investor, but two recent lectures by Niall Ferguson, a Harvard Economic-Historian, make a strong case for the impending economic collapse of the United States. He predicts default and/or rampant inflation and suggests re-allocating one’s portfolio to a mixture of gold and foreign investments. I can already hear you saying “no, this time won’t be different, America will recover”, but I suppose I just wanted to hear it straight from the source. Any words of wisdom would be most appreciated.

At any given time, it is not difficult to find somebody professing to know the short term future of the economy or the capital markets.  Quite often these people are highly regarded professionals armed with plenty of data to support their claims.  And quite often they are wrong.  History is replete with examples of how investors made wholesale changes in their portfolios based on excessively optimistic or pessimistic predictions, only to regret it deeply after the opposite occurred.

We believe that the future is fundamentally unknowable, and thus cannot be predicted with any precision. We believe investors could use their time and energy and brainpower much more effectively by controlling what they can control instead of trying to predict what cannot be predicted. We do this for our clients and with our clients by maintaining portfolios that are designed to address a wide range of economic and market climates, including inflation.


Recommended reading – NY Times: A Dying Banker’s Last Financial Instructions

Here’s what Mark Metcalf has to say about a recent article from the New York Times, “A Dying Banker’s Last Financial Instructions”, in which ex-Wall Street salesman Gordon Murray talks about a better way to invest:

Not only is this a powerful article about life, but it just happens to come with some top-notch investment advice.  While “The Investment Answer” differs slightly around the edges from Merriman’s investment approach, it is very much in line with our philosophy, and I would recommend it highly to anybody in search of a prudent way to invest.

Do I need bonds at age 30?

I am 30 years old and invest fairly aggressively. I have been advised to keep 10 to 15 percent of my portfolio in bond funds, but that seems to me like a waste. I can’t see that 10 to 15 percent in bond funds will do me much good except to satisfy some formula. Am I missing something?

Your long-term strategic asset allocation decision should not be based solely on your age.  You should also consider your financial ability and emotional willingness to withstand volatility.

Some of our clients who are 70 and older are quite comfortable with 70 percent in equities and 30 percent in fixed income. Other clients in their 30s feel that is about as aggressive an allocation as they can handle.  Everybody is different, and a big part of a financial advisor’s job is to help clients determine a suitable asset allocation based on their unique circumstances. (more…)

Inflation, politics, history and investments

Fear is never far from investors’ minds, especially during tumultuous times like these. Nervous investors will always find plenty of authors, gurus, prognosticators and analysts who are willing and able to feed these fears.

Fear isn’t necessarily bad. It’s one of the two primary psychological forces that drive the market (the other, of course, being greed). When you’re ready to buy an asset, you want to get the lowest possible price. Logically you should hope that the seller is fearful and eager to sell.

Fear can also be useful by reminding us that risk actually exists and bad things can happen when people plunge ahead in spite of warning signs they should be noticing.

However, it’s easy to get carried away and lose sight of the facts. This can happen to even the smartest investors. A case in point is one of my clients (I’ll call him Jim here, though that’s not his real name), a veteran scientist with a distinguished career at a large, successful company. (more…)