Retirement For Life

Staying Invested in a Down Market - Ep 31

• Christian Cyr, CPA, CFP® • Season 2 • Episode 31

Share episode

Market downturns are inevitable, but a properly structured retirement plan with guardrails can protect retirees from making emotional decisions that damage long-term financial security.

• The stock market historically grows approximately 10x over a 20-year period despite occasional downturns
• Missing just the five best market days since 1988 could reduce long-term gains significantly
• The danger zone (five years before and after retirement) requires the most conservative allocation
• Proper retirement portfolios typically allocate only 30-60% to stocks with the remainder in bonds and "mailbox money"
• Income needs should be primarily met through stable sources like social security and mailbox money (15-25% of portfolio)
• When markets decline, distributions should come from bonds rather than selling depreciated stocks
• $100,000 invested in the S&P 500 over the past 20 years would grow to $723,000, but missing the 10 best trading days reduces this to just $326,819
• The stock market always recovers—even including extreme drops like the dot-com bubble, 2008 crisis, and pandemic, the S&P 500 averaged 6.62% annual returns from 2000-2020
• Four key facts during market downturns: income depends on mailbox money and social security, distributions come from bonds, bonds often rise when stocks fall, and markets always recover
• Removing emotions from investing decisions is critical for long-term success


We love hearing from you!! Record your retirement questions anytime at www.RetirementForLife.com


  • Subscribe to our channel for our latest content visit: Our YouTube Channel
  • Elevate Your Retirement with the AIM Secure Retirement Assessment... our most popular tool! Powerful customized insights for retiree's or those nearing retirement. Answer 8 simple questions and receive your personalized assessment including the top three action items most likely to supercharge your chances of Retirement Success.
  • If you're interested in learning more about our trademarked AIM Retirement System, visit: AIMRetire.com
  • Want to connect with Chris? Schedule a 15 Minute Retirement Readiness call to discuss whatever's on you mind about retirement Retire15.com or just shoot him an email at mailto:admin@cyrfincial.net
  • Try out the industry's leading financial planning software on your own. We give RFL listeners unlimited free access to the Free Online Planning Tool

Investment ad...

Introduction:

Retirement for Life, your passport to a comfortable and confident retirement. The podcast that's equal parts education and entertainment, where we break down the retirement maze with a dash of fun and a heap of wisdom from your host, Christian Sear, CPA, the passionate retirement specialist and president of Sear Financial Wealth Advisors. The independent registered investment advisor specializing in the AIM retirement system.

Christian Cyr, CPA, CFP®:

All right guys, welcome to Retirement for Life podcast. Today is the market is crashing. What should I do? This is a definitive podcast. I want new clients who come in for the first time to watch this, because it helps explain what we're doing to protect people. But more importantly, andrea and Emma, when the market goes down like it has recently, do you get phone calls?

Andrea Brannon, CFA®-IF:

I get quite a few phone calls. Actually clients say that I talk them off the ledge them off the ledge.

Christian Cyr, CPA, CFP®:

I feel like this should be the video that people watch, the podcast that people listen to anytime we receive a phone call like this, because it is a bit repetitive. I look back 2013 are the first documents I have where we're trying to help clients understand what to do in a down market. So today we're going to answer that question. I think it's really great because Emma's going to show us how we're basically setting up a retiree's situation so that, in an ideal world, they should not have to really worry about stock market. Now can we start with a few basics here? The stock market goes up about 10x over a 20-year period. What's that mean? What's 10x?

Emma Bean, CFA®:

If you put in $1, it's going to turn into 10 by the end of those years. And when we're talking about your portfolio as a whole, those are big numbers. And when we're talking about your portfolio as a whole, those are big numbers. But I do want to say, like, when we talk to clients, you know they're not focused on the long term. They're literally looking at the stock market over the last week and seeing that drop. Yeah, and I think you know, rightfully so A lot of our clients. They've saved their entire life. For this moment, so they don't want to see everything they've saved lose money. Which is why I think maybe this podcast can help um give, give our clients an idea of, yes, you see the stock market dropping in front of your eyes, but in reality, you know, if we stick it out for the long term and put these guardrails in place, they're going to be better off yeah, and when I have these conversations, I always go back to the plan that we've constructed for them and explain to them why they don't need to be worried.

Christian Cyr, CPA, CFP®:

Yeah, I mean. So what I wanted to say, first and foremost, is that the stock market is not the bad guy. It gives us scares but it can really lead to, over the long run, making us money, over the long run, making us money. And when you get out of the market, you often make mistakes, and that's what we're going to talk about. And, andrea, I know you want to play the guess, the number game.

Christian Cyr, CPA, CFP®:

So let's just give a person an example of what happens when they get out of the market and they miss some of the time.

Andrea Brannon, CFA®-IF:

Yeah, so my article is three reasons to stay invested right now from Fidelity. Basically it's you know, when the market is volatile, clients want to seek safety. But my article was about why that can backfire. So a hypothetical investor who missed the five best days in the market since 1988 through December 31st of 2024 could have reduced their long-term gains by what percentage?

Christian Cyr, CPA, CFP®:

That's a long time period.

Emma Bean, CFA®:

Yeah.

Christian Cyr, CPA, CFP®:

I'm going to get my marker out.

Emma Bean, CFA®:

Okay, okay, I feel like we've got to redeem ourselves here, andrea.

Andrea Brannon, CFA®-IF:

Good luck, Emma.

Emma Bean, CFA®:

All right, I'm ready.

Andrea Brannon, CFA®-IF:

Okay, so if you just missed five days in the last Five of the best days, which, counterintuitively, is during a bear market a lot of the time.

Christian Cyr, CPA, CFP®:

Okay, so like, and the reason you asked this question is because I get out of the market and then I'm not in it, and the reason was so I don't lose money. But actually actually, by getting out of the market, you're losing money because you're missing some of the best days which occur.

Andrea Brannon, CFA®-IF:

Yep, which usually occur while the market is down.

Christian Cyr, CPA, CFP®:

I've got my answer, the bounce back days.

Emma Bean, CFA®:

Yeah, me too. Okay, here we go. Oh, we're way different. 26, 37, yep, I mean the five best days. You think about those days where you know, after the markets dropped significantly, the next day can be a huge bounce back. So even with just five days, it could be.

Christian Cyr, CPA, CFP®:

We're talking, at least you know this is not every day because, like the, what's the? Annual. What's the annual return over that period?

Emma Bean, CFA®:

We're talking just five days.

Andrea Brannon, CFA®-IF:

We're talking just the difference in those five days what they've missed out on.

Christian Cyr, CPA, CFP®:

All right, so help me understand, like if the market bounces back 5% one day.

Andrea Brannon, CFA®-IF:

If you've missed those five best days. If you had started with the $10,000 in 1988, you've missed those five best days you would have about $330,000. If you kept in the market and hit those five best days, you'd have over $500,000.

Christian Cyr, CPA, CFP®:

Okay, so this is a total return over the entire period.

Andrea Brannon, CFA®-IF:

The long-term gains. Yep, what they missed. Are you just mad that you lost?

Emma Bean, CFA®:

Yeah, I think that's a point for me, so I'll take it where I can get it.

Christian Cyr, CPA, CFP®:

Okay, that's fine, I'll accept the loss. So here's the thing we're doing with retirees' portfolios. Okay, emma, do you want to explain?

Emma Bean, CFA®:

Yeah. So, like I mentioned earlier, if you have the right advisor, they should be setting you up for success. And one of those things is your allocation during that danger zone. We've talked about the danger zone many times. Where you know the five years before and after retirement, you should be allocated maybe the most conservatively that you will ever be allocated in your life. So what that looks like is what we've talked about before those guardrails, including mailbox money, which is huge.

Emma Bean, CFA®:

We typically allocate anywhere from 15 to 25% of a retiree's portfolio to mailbox money and, Andrew, we talk about this every day. It's a portion of your portfolio that is not going to lose money but also provide you that income in those years from about 70 throughout the rest of your life and make sure that you're you're set up for success. The other thing is the bond portion. You know we have bonds in in our retirees portfolio to last then until they start social security. That's where their income is going to be coming from. And then we have essentially the cherry on top, which is those stocks, and we're typically allocating we're from 30 to 60% stocks, depending on someone's risk tolerance. But that's an area where we have those guardrails in place and we don't have to even worry about that stock portion Exactly. It's more just, therefore, growth.

Christian Cyr, CPA, CFP®:

Okay. So what we're saying is the stock market can be awesome, but it can also be awful to retirement and yes, we've talked about this so often on this channel, on this podcast, that the danger zone is crucial five years before and after retirement and when we're putting together a 35-year plan in place. We're aware of that, which is why we're using a conservative portfolio allocation. If you look, for example, right here, typically only half of your money is in the stock market for our typical client Right, and the other half is being used to essentially, as much as possible, guarantee income for Starting at age 70 usually, and going for the rest of your life, and everyone's situation is different. But this is a great visual. I know there's a lot of stuff going on. It looks like Las Vegas, but what we're showing here on the screen is that your income need is basically filled up by things besides the stock market, right, and I think that's an important point. And, by the way, when the stock market goes down, what are we doing? Are we selling all of your stocks?

Emma Bean, CFA®:

No, no, we're watching it and actually when you know the stock market goes down, that's actually a great opportunity for us to re up your equity exposure and buy when the prices are down. So really, if you need money out during that time, we're giving you that income from your bonds rather than the stock, and actually buying stock when the market's down. Dollar cost averaging.

Christian Cyr, CPA, CFP®:

Yeah, I've done a lot of work on it recently. And even when the market goes down by 25%, and even when the market goes down by 25%, there's very little, if any, distributions retirees are taking from the stock market. So the point is that you will recover. The stock market will continue to go down. If it's a small drop, like a correction what do they call it? Like 10% to 20%.

Emma Bean, CFA®:

Yeah, which is the majority of the drops that you see in the stock market are just that smaller correction.

Christian Cyr, CPA, CFP®:

Yeah and so the history shows us that if you have a correction of 10 to 20 percent, the stock market will take about five months to go down, and it'll take about four months to to come right back to where it was. And so the video I made recently of one particular client was that he got out at the worst possible time, and now he's trying to wonder when he should get back in, because the day he got out is when the stock market marched up 75%.

Andrea Brannon, CFA®-IF:

Right.

Christian Cyr, CPA, CFP®:

And so just be patient, because what we're doing is we're saying look, the stock market is going down, but we don't know when it's going to start to go back up. And, by the way, when it does go up, it's going to go up a lot, and we don't want you to miss that, which is the point of my guess the numbers was you don't know what day to get back in.

Andrea Brannon, CFA®-IF:

You could miss it.

Christian Cyr, CPA, CFP®:

All right.

Emma Bean, CFA®:

Yeah, that's actually a great intro to my guess the number game too, which we should do now. So you know, we've seen the last five or so years have been fairly good. We've seen ups and downs, but what I really want to talk about is, you know, some more turbulent times. So we're talking, you know the dot com bubble, the 2008 financial crisis and then, most recently, the global pandemic, the 2020 drop in the market. So that's you know the time, from 2020 or 2000 to 2020. If you had stayed invested in the S&P from that time period, 2000 to 2020, what would your average annual total return have been? So this is staying invested throughout all three of those extreme drops and also staying invested, you know, when it bounces back up. So what's the total all?

Christian Cyr, CPA, CFP®:

right so annual return so this includes the tech bubble where it went, that you said where it went down, 50 and 2008, where it went down what Andrew said earlier, like 55 to 57. Yeah, okay, all right. By the way, this is a fair question. I'm not happy with the last question. Brooke, we're going to have to go.

Andrea Brannon, CFA®-IF:

I'm happy because Emma got it right.

Christian Cyr, CPA, CFP®:

Total return and got it All right. Divid it All right Dividends.

Emma Bean, CFA®:

All right, let's see what your answers are 8.9. Andrea 12. The correct answer is 6.62%. So that just goes to show you know there's positive return, Even when you see extreme downturns. This period includes, you know, over a 50% drop and two 30% drops, and yet the 21-year period that we're looking at here, you still would have had an average annual return over 6.5%.

Christian Cyr, CPA, CFP®:

So what would be said so far? Stocks go up over the long term. Protect your portfolio with the right advisor. This is my proof. My favorite class in high school was geometry, and it fit my mind, because you state facts and then, after you state facts, you can jump to a logical conclusion. So if I could say one thing, and one thing only, to a person, an investor, a retiree who was thinking about getting out of the stock market because it was going down, I would say this With a proper retirement portfolio, when the stock market goes down, there are four things happening.

Christian Cyr, CPA, CFP®:

Number one your mailbox money and your social security generally are what determine your long-term income needs, not the stock market. Does the properly set up retirement? I'll say it again. Number one your long-term income is dependent on mailbox money and social security. Number two if you do need distributions above and beyond your mailbox money and your social security, it's not coming from the stock market either. We are taking that from bonds Generally. Number three when the stock market goes down, bonds go up. So you're not selling your stocks, we're waiting for them to recover. Point number four the stock market always recovers. That's what I would say if I had. That's not one sentence. That's several sentences, but that's what I would say.

Emma Bean, CFA®:

You've done all the work to choose your advisor, and hopefully you've chosen one that is putting you in a position where you can succeed, and so that should remove all of the stress for you and allow you to kind of ignore what's going on in the market and just trust in your advisor that they're doing what's right for you.

Christian Cyr, CPA, CFP®:

Okay, there are six basic rules of investing. Okay, choose the best investments, reduce fees as much as possible, minimize taxes. And what's rule number four? You guys?

Andrea Brannon, CFA®-IF:

Remove emotions.

Christian Cyr, CPA, CFP®:

Remove emotions, okay. Five is don't listen to gurus. And six is be diversified, which we've talked about a diversified portfolio. You have to keep your emotions out of investing and you have to keep every study and I'm not going to show it on the screen here if you're watching this podcast but every study over the last 50 years by people smarter than I show that people who get emotional in investing they're just doing themselves a disservice. It depends. They'll say you'll lose 1% to 2% a year over the average, but, as that video that I had, as I showed, we have a client who's a quarter million dollars because he got emotional.

Emma Bean, CFA®:

You're essentially trying to time the market and if it relies on your emotions, most likely that's not going to be a positive thing. You're most likely going to miss out on those bounce back periods. That's not going to be a positive thing, You're most likely going to miss out on those bounce back periods.

Andrea Brannon, CFA®-IF:

Yeah, I mean just in general. Making a decision based on any emotion is not a good idea, but especially in this case.

Christian Cyr, CPA, CFP®:

All right, so one more guess the number game. I want you to show this chart, brooke. I found this fascinating. It relates to what Andrew was saying. So $10,000 invested over a time period this was what 15 years, 20 years this was something similar that you just said, andrea. Look at this. You make some money here $70,000, I guess, just missing 10 days. It's incredible. So here's a question for you. All right, so here's my guess the number game. Studies show that if you miss just a few of the best days in the market, like Andrea told us, you're going to miss out. I have a bit of a twist on that. Over the past 20 years, the S&P annualized return has been 10.4%. So if you invested $100,000 20 years ago in the market, today you'd have $723,000. Well, what if you missed the 10 best trading days? So my question to you, andrea and Emma, is what would you have? You'd have something less than $723,000 in your account by missing the top 10 days $723,000 in your account by missing the top 10 days.

Emma Bean, CFA®:

Okay, I can't wait to see your answers. I'm nervous. $400,000.

Andrea Brannon, CFA®-IF:

I said the exact same thing. Oh my God, Okay.

Emma Bean, CFA®:

I call it the under. I'm taking the under.

Christian Cyr, CPA, CFP®:

Brooke. What was the answer?

Emma Bean, CFA®:

The actual answer is $326,819.29. Yeah.

Christian Cyr, CPA, CFP®:

Okay, so funny.

Emma Bean, CFA®:

We each get our half a point right.

Christian Cyr, CPA, CFP®:

Again, which one.

Emma Bean, CFA®:

All right, we'll take a half a point.

Christian Cyr, CPA, CFP®:

I'm still protesting. The first question, but whatever, whatever.

Andrea Brannon, CFA®-IF:

Sore loser.

Christian Cyr, CPA, CFP®:

Here's the deal it's always your decision, but you've hired a financial advisor hopefully a retirement specialist, and you're nervous and that you need to trust the person that you decided to trust or the group of people that you decided to trust or the group of people that you decided to trust, and if you're in the right position and your retirement's been structured properly, you should not have to worry much or at all about the stock market.

Andrea Brannon, CFA®-IF:

Yeah. I find it to be an easy conversation. When you look at their structure of their plan, you know, and you can just show that to them and they prove it to them that way, and then they are more relaxed.

Emma Bean, CFA®:

Yeah, we've included the Maddox money that will not drop. We've included bonds. That's where your income is coming from. There's no reason to worry because likely the stock portion of your portfolio is going to bounce back, as we have just showed, and it's much more harmful to get out of the market than just ride it out.

Christian Cyr, CPA, CFP®:

And if you do insist on getting out, I insist that you tell me when you want to get back in. I always love the customer. He says, okay, I'm getting out, I don't care what you say. And then he says to me and you'll tell me when to get back in. Right? No, I will not. That's the whole point of this podcast. You don't know when it's going to recover. All you know is that it will recover.

Andrea Brannon, CFA®-IF:

So yep All right guys.

Christian Cyr, CPA, CFP®:

Thanks for a great show today. Brooke, thanks a lot, Emma, andrea. I know we have work to do, but it was a great show. Let's make every person who calls the office from now on listen to this podcast so that they have a better understanding of why they should just stay invested for the longterm, until next week.

Emma Bean, CFA®:

Thanks, bye.

Outro:

Investment advisory services provided by Sear Financial Inc. Sec registered investment advisor Bye.

Head Shot

Christian J. Cyr, CPA, CFP®

Host
Head Shot

Andrea Brannon

Co-host
Head Shot

Emma Bean, CFA

Co-host