Retirement Answers

Jacob: 00:01

I know it can be hard to sit still and just simply not take action during market downturns, but use that seventy two hour rule, evaluate where you're at, make sure your overall investment decisions match your long term goals and what your plan says. If you don't have a plan, get it in place. That way you can have something to guide your decisions whenever those hard times come. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place.

Jacob: 00:31

Hey there. My name is Jacob Duke, each week, I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke.

Jacob: 00:49

I'm your host as always. This week on the show, I wanted to talk about market volatility and specifically how to navigate market volatility in retirement. If you've been paying attention to the last few weeks here in the investment markets, then you've seen a little bit of turbulence, little bit of volatility that's starting to take place because of many different things that are kind of happening all at once. Not really going to get into all of what that means in terms of like specifically for this situation. But in general, I wanted to talk about market volatility and kind of how it relates to you as an investor, retiree, as someone who's approaching retirement and kind of the feelings that you start to get whenever these things happen, right?

Jacob: 01:26

Hey, the portfolio is down 15%. What do I do? Can I still retire? Can I still stay retired? Should I make changes in my portfolio?

Jacob: 01:33

All the different emotions that kind of flood in whenever we see our account balances going down. I wanna talk about some of the different ways that you can help plan for these different events and expect market volatility to happen throughout the rest of your life, specifically in retirement and what to do about it. Some practical ways that you can navigate this and make sure you make the wisest decisions possible during those hard moments as an investor. So the first I wanted to just start with, you know, what steps can you take or what can you do in the moment? Like during the heat of the moment of the market going down, your account balances going down, what are the things that you can do to kind of, I guess, hold your water if you will, or stay steady with what you're doing.

Jacob: 02:12

So the first thing I'd recommend is just taking a deep breath or going for a walk. And the reason for this is ninety nine percent of your bad financial decisions that could occur, they're gonna happen during the heat of the moment. Emotions are high and it feels like the world's on fire. Things are just going downhill. And you might be wondering yourself, how can I just let my nest egg go through this without doing anything?

Jacob: 02:34

I should be taking some sort of action. And that's what we tell ourselves because of the emotions we feel. And it seems illogical because we think that action needs to be taken and do something quickly. That's kind of the feeling we get. But emotional decisions are rarely good decisions.

Jacob: 02:47

So during those quick market drops like we saw last week and the week before, this is where I like to implement the seventy two hour rule. So take time, sleep on it, just like you would any big decision. If you're buying a house or purchasing a car or you name it, maybe deciding to change a job or something like that, take time to think about it. Take time to just sit and sleep on it. Worry or the emotions that you currently have, let those kind of go away and then come out the other side and say, hey, what's logical?

Jacob: 03:16

Rather than let my emotions speak, what's the logic here and is it still a sound choice? So take this seventy two hour rule and apply it to your investment decisions much like you would just big life decisions. So that's the first thing is just slow down, take a breath, turn off the news, go for a walk. And after a couple of good night's sleep, I think your perspective might change. Things might not be as bad as you originally felt that they were as things started going south.

Jacob: 03:40

So that's the first thing, you know, take a breath. The second thing I'd encourage you to do is to zoom out. As investors, we tend to view our investments in a vacuum. What's my return this month? What about yesterday?

Jacob: 03:52

What about this year even? And when we look back over, you know, the history of investment markets or maybe our performance in our accounts, good or bad investments typically can't be determined in a short amount of time, right? We've got so many different factors that play into it, but typically time is the ultimate disinfectant when it comes to investing. If you wanna have a good investment, all you can do is look back over the last ten plus years and see, hey, was this a good decision or not? So, most investments take years to play out and honestly, time is the great equalizer here.

Jacob: 04:24

So if you can just zoom out, look at your investments over long periods of time, and we can see that it's hard to make any really good investment decisions based on short time periods, it's gonna be fairly clear to you that making a decision even on the last five years of investment performance is really that's a short time to make a decision based on. So what I'd say is this is zoom out. So yes, the market over the last, you know, twenty one days has gone down in value from the all time high. We'll get into more of this here in a second. But the main thing here is I'd say zoom out and look over the last two to three years.

Jacob: 04:55

What has happened? Have we gone up or have we gone down? What has happened in terms of your total return over the last two years, right? And so whenever you start to do that, you see that, oh goodness, we've actually made a lot of money here. And this one small hiccup, it's not necessarily a big deal whenever we zoom out.

Jacob: 05:12

But here's the problem that we run into as investors and just as humans is we always anchor to the most recent thing. So if we're at an all time high, which we were, I think it was the July 16 in 2024. If you're listening to this in the future, that's kind of the date range we're looking at here. But the July 16 in 2024, that was the most recent all time high that the market or the S and P 500 hit. And so if we look at that and we say, hey, we have gone up, we're at this point, if we go down from here, we're losing money.

Jacob: 05:40

But by doing that, we've anchored to this most recent all time high and that's just not realistic, right? So we kind of have to zoom out and avoid anchoring our minds to, hey, here's what the current value of our account is today. Let's say it's a million dollars. If we go down by 10%, now we have $900,000. Oh my goodness.

Jacob: 05:57

Well, you know, two years ago you only had $750,000. So what's what gives and you know, what's the correct thing to anchor to there? So I would just say number two here, zoom out. That's gonna be a big thing that you can do to help yourself to stay sane. And then finally, you know, revisit your plan.

Jacob: 06:14

The reason that you have a plan is for these exact moments. You know, bad markets and tough economic cycles, they shouldn't be surprises to us. In fact, if you're building a plan and you've built one, you expect these different time periods to happen. And they're gonna be different magnitudes. You're gonna have, you know, drops of 10%, drops of 20%, drops of 40%.

Jacob: 06:33

And it's for these reasons that you've created your investment plan. You know, that plan contains the different principles in which you're gonna operate and make decisions based on and under very rare circumstances, would I say go outside of those different guiding principles. And so the key here is that you need to build that plan whenever you have a clear conscience or a good line of thinking, meaning things aren't emotional, you're not in a bad spot from a financial or investment standpoint, you're making good decisions based on your current life situation saying, whenever I don't have to worry about something bad that's happening, I can go make a good decision so I can tell myself written down on paper via this plan, I can have what I need to do in those moments of hardship. Whenever things are going south, what did I say when things are going really good? What did I tell myself that I need to do in this moment?

Jacob: 07:18

Rather than listen to my emotions, what are the principles I need to continue to follow? So revisiting your plan or just having a plan in the first place is huge. And I would just say this, you know, every holding your portfolio is there for a reason and it has a goal to accomplish. And we start making changes without following this plan. Your financial success could be in jeopardy over the long term.

Jacob: 07:37

And most of the time, the best action that you can take whenever volatility starts to happen is no action at all. I would say that if you have a plan, there's a reason you have that. And if it's established based on good foundings and good principles, then you have really nothing to worry about because the plan should factor in you having these moments of volatility or you losing money for specific periods of time. So instead of taking a bunch of action, altering the plan, making a bunch of adjustments, I just say trust your plan, trust your advisor if you have one, and then go do something that you enjoy and let them, let the plan or let your advisor handle the stress or the worry that comes with managing those different situations. So that's number three, you know, revisit your plan or get a plan in place if you don't have one already.

Jacob: 08:22

And then finally for my clients, I say, if you're still worried or anxious after doing those first three steps, give me a call. I'm here for you. If you're obviously not a client, then, you know, maybe there is value in having an advisor, especially during those moments because we all know that behavior is really the determinant of someone's financial or investment success. It's less about what you pick and when you get in or out of the market. It's way more about making the right decisions behaviorally over time.

Jacob: 08:47

So that's the final step is if you have someone that you trust, an advisor or someone else, talk to them and say, here are the things that I'm worried about. Am I being logical or not? Tell me where I'm wrong and let's figure out what we need to do, if anything, moving forward. All right, so those are kind of some different steps or principles that you can apply to your thinking whenever you're making these decisions around what to do during big market events. Now let's apply these in the context of the last two weeks.

Jacob: 09:13

So let's go back to 07/16/2024. If you're listening to this the future, that's the date range we're looking at. But if you're listening to this in the present, and it was just a couple of weeks ago and it's fresh on your mind, July 16 was the all time high for the S and P 500. Since that point until August 9, so you're looking about a three week period there. Since that point, it's down 5.71%.

Jacob: 09:34

There's a lot that happened there to make it feel a lot worse, but it's down 5.71% from that all time high, through 08/09/2024. Now, how did this happen? Okay, so if let's go back in time, let's look at this. On the July 17, the market went down 1.39%. On the twenty fourth, it went down 2.31%.

Jacob: 09:52

On August 1, it went down 1.37. On August 7, 1.84. And August 5, it went down 3%. So those are the largest notable days that were down or negative over this three to three and a half week stretch. So there obviously were others that were down, but they were all less than 1%.

Jacob: 10:10

So these are the notable ones with the biggest being on August 5, it was down 3%. It actually closed a little bit higher than it was throughout the whole trading day. So it started off way worse than that. Now, if you saw everything go down 3% in one day and you heard all the noise and information on the news, I'm sure you had some questions. Number one, what's going on?

Jacob: 10:30

Number two, should I sell? Should I make changes? And if so, what changes do I need to make? And those feelings are normal. It's okay to kind of get these emotions of like, oh my goodness, my life savings is going down the drain because of XYZ reason.

Jacob: 10:44

And that's not, you're not gonna be able to avoid the feelings that you might get. But what you do from that moment is really the things that help you make money long term. So this is where the seventy two hour rule plays a big role, right? So we don't wanna make a reactive decision here. Wanna say, okay, evaluate where we're at.

Jacob: 11:00

Let's sit on this for a couple of days. Let's take some time to think about it. Let's go for a walk, enjoy something with a friend or family and then come back and reevaluate and say, is it as bad as we thought it was? And so if we look at that in this particular sequence of events, it would have been really helpful to use this seventy two hour rule before making any major adjustments. And the reason for that is after that negative 3% day, three out of the next four days were actually positive with two of those days being up 1.04% and then another one being up 2.3%.

Jacob: 11:32

Now this goes to a big thing that I'll always harp on. Whenever we have a really bad day in the stock market, majority of the time, some of the best days in that twelve month period in that calendar year are following the worst days. Meaning, let's say you have a day that the market's down 5%, well, the odds of having a good positive day in the next week is gonna be very good. So if you get out after one large down day, that means that you could be missing out on some of the best days that happen, because historically that's when those really, really good days happen is after the bad days. So with this understanding of, you know, some of the best days occurring after some of the worst days, it demonstrates the importance of number one, that seventy two hour rule, but also reminds you the importance of having a plan.

Jacob: 12:14

Perhaps the most valuable thing that you can do to a quote win when it comes to investments is being proactive, not reactive. And so when you have a plan, you know what you're gonna do before the good thing or the bad thing happens or before you reach a certain age. Whatever you're trying to accomplish, you have a plan for that because the plan in and of itself is proactive rather than no plan. You're gonna have to be reactive whenever bad things happen. So a plan helps you avoid all the bad decisions, at least for the most part, it helps you give you really good guidance because you're making and developing that plan whenever you have a clear mind, clear thoughts, and you're able to not make decisions based on emotions.

Jacob: 12:50

So having a plan is really the biggest part, but specifically you can outline your investment allocation with intention and form that allocation when things are going really well. I like to do this and be proactive by using retirement income buckets. And if you've been listening to me for a while, you've probably heard me talk about this many times. But for the newer listeners, the retirement buckets are built around your income needs. And the way I like to do this is breaking out into three different buckets.

Jacob: 13:14

The first one is your cash bucket or your money market bucket. And what I like to do there is have two years of living expenses that you need to distribute from your savings. I wanna have two years of whatever that amount is in cash. So for example, if you need $50,000 per year out of your investment portfolio to live on, on top of whatever other income you might have, whether it be social security or pension, let's say you need 50,000 total from your portfolio. That means I want a $100,000 in cash, which could be in the money market, but I want it in cash so that we can sustain life for two years without having to pull from our stock bucket in the down market.

Jacob: 13:49

Now the second bucket is I wanna have three years living expenses in fixed income. That can be CDs, it can be bonds, it can be treasuries. It's gonna be something that has potentially a higher yield overall than cash, but it's also not the stock market. So there's slightly more risk associated with those different holdings, but it's not a stock. So in a short term, it shouldn't have as much of a drawdown as stocks would have.

Jacob: 14:12

And then finally, that third bucket can be everything else, which would be invested in stocks. So what this does is, this creates a five year buffer of having to pull from your stock bucket at a loss. And these different buckets, these are minimum requirements. So you can have more than two years of cash or three years of fixed income, but not too much more. The idea here is to tailor this to your specific needs.

Jacob: 14:34

But the purpose of doing this is saying if you have a really big market event where it goes down and stays down for five years or so, you wouldn't have to create income by selling your stock positions at a loss. And personally, I think this is a much better approach to use these retirement income buckets instead of following a standard sixtyforty portfolio or whatever, you know, the different rules of thumb might be for retirees. Using these buckets, it tailors your investment allocation to your specific needs, but it also helps you navigate market volatility because you've assigned a purpose to the different sections of your savings. You've kind of mentally allocated or bucketed out different purposes. The cash bucket is not meant to make money.

Jacob: 15:11

It is there to be there if something happens. The stock bucket is meant to make money long term, which you have to do in order to beat inflation, adjust your income over time for the cost of living increases that you might encounter. And also kind of this midterm bucket, which is your CDs, your bonds, slightly longer than a cash time horizon, but the idea is to make a slightly higher return there for a little bit more risk than cash. So that's the whole idea with retirement buckets. And if you'd like to see an example of what these buckets look like and how I help my clients with these, shoot me an email and I'll share an example with you.

Jacob: 15:42

That way you can look at that and actually see what talking about visually. My email should be down in the description below. So shoot that over to me, happily send that to you if you think you find it helpful. In addition to having your retirement buckets, you can simply just write out what you should do during certain scenarios. You know, it doesn't have to be over the top, but you can simply take out a piece of paper and write things down such as, you know, don't trade my accounts until they're down at least 20%.

Jacob: 16:05

Or if my buckets are off the targets by X percentage, do a rebalance or whatever it might be like, outline your rules that you can establish for yourself. Again, this is part of that planning process of being proactive. Write down all the things that you can do when you're allowed to do them, rather than not having a plan in place and then just having the emotions run the show whenever that moment happens. So take the time to just kind of think through what should my action plan be whenever things don't go well, and then how to navigate that. And this will help you, you know, having it written down will help you make the best decisions you can in those moments.

Jacob: 16:42

Now, whenever I often talk about this with my clients, the biggest thing that I would say is this, when it comes to having market volatility, it actually presents opportunities for you that most of the time we're not aware of. Working with retirees, tax planning is a big deal for me. So we like to make sure we take advantage of tax opportunities to help lower your tax bill over your lifetime. And one of the biggest things that you can do is a Roth conversion to help lower your lifetime tax bill. Now, some of the best times to do those Roth conversions are actually when the market has gone down.

Jacob: 17:14

What you can do is you can you can do that Roth conversion and you can convert the same number of shares, but those shares are actually gonna be priced at a lower amount, which in result actually decreases the amount of money you're having to convert overall. So you're getting to convert a lower dollar amount of holdings, but the share amount is the same, which means lower taxes on that conversion amount. So just for an example, if you have a $100,000 and you're trying to do a conversion on that, and then it goes down to $80,000 even though you own the same amount of shares, converting that $80,000 instead of the $100,000 is advantageous because you're only gonna pay taxes on the 80, right? And then once you get that money into your Roth, and let's say the market recovers over time, you have the same amount of shares in the Roth IRA, but now all of that growth that's happening in your Roth IRA is gonna be tax free. So you kind of get to win on both sides of this.

Jacob: 18:04

You get to pay less tax on the front end and have more tax free growth on the other side if you can convert when markets are down. So when markets go down, don't assume that it's all bad. You actually can find some opportunities to do some different positive things in these moments. One of those being raw conversions and other ones simply being, hey, I've got a bunch of extra cash on hand. Is there a way to deploy this and get this working for me in this moment and take advantage of these lower prices to help me grow my portfolio long term?

Jacob: 18:27

And so it could be a moment to actually go into that stock bucket if you have a little bit of extra cash on hand and invest at a lower price or a discount. And finally, all of you who are not retired or maybe you're ten years plus from retirement that might be listening to this, you kind of in some sense want the market to go down so you can continue saving or investing, whether it be into your four zero one ks or just on a monthly basis, whatever your saving schedules are, you can actually save into, you can actually save and buy in at a lower price. So a downturn would actually be a good thing for you, especially for those of you who are a little bit of ways away from retirement. But even for those of you who are in retirement, you can focus on some of these opportunities I mentioned already here, and I'm sure there are plenty of others that are out there, but don't assume everything is bad because your account values have gone down. We can find positive things to take from it and opportunities to ultimately help you have more money long term or save on taxes long term.

Jacob: 19:19

So hopefully this quick talk on market volatility and how to navigate it has been helpful for you, maybe encouraging for you as well. I know it can be hard to sit still and just simply not take action during market downturns, but I encourage you just to use that seventy two hour rule, evaluate where you're at, make sure your overall investment decisions match your long term goals and what your plan says. If you don't have a plan, get it in place. That way you can have something to guide your decisions whenever those hard times come. Take advantage of the opportunities that could be there.

Jacob: 19:46

And the final thing I wanna leave you with is this, you know, I've heard it said often that, you know, people don't make money by selling a house, they actually make it whenever they buy the house. So buying it at the right price is the most important thing rather than selling it for the highest price in the future. You make money on the buy, not on the sell. I think the same thing could be said for market downturns or whenever the market's going up. People actually make money whenever things get hard and drawdowns happen.

Jacob: 20:10

That's when people really make their money. So I encourage you to take some time to study up on who has made a lot of money in the stock market, some of the prominent investors over time, and see how they reacted. You know, Warren Buffett says, you know, I would be fearful when others are greedy and greedy when others are fearful. Basically this opposite style approach, that is how you should approach investing because as soon as we jump in with everyone and say, Oh my goodness, I'm scared. That's whenever we start losing money or get in or out at the wrong time.

Jacob: 20:36

In long term, it's just not a recipe for success. So hopefully this has been encouraging for you. I hope you have a great rest of your day and we will see you back here next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net.

Jacob: 20:56

And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.