The first reason investors become anxious is because market declines underscore the gap between the financial resources needed to maintain existing lifestyle in retirement and current reality.
This gap is particularly troubling for business owners within 10 years of retirement. These investors have an additional dose of uncertainty to absorb with their business value as they move toward retirement. The combination of undersaving, which is why there is a gap in the first place, and concern about how and when to sell the business can create an untenable scenario.
The other reason investors worry is because they lack discernible, specific goals, so declines in the market happen without any context. Money is primarily a vehicle to take you somewhere and without that somewhere it becomes a measuring stick without any purpose. Just wanting “more money” or “higher returns” is not a real goal unless it is attached to something personal and meaningful.
There are no immunizations against temporary stock market declines. Pullbacks happen regularly for some reason or no reason at all. Since 1980 there have been 10 calendar years where the broad U.S. stock market ended the year at a lower value than where it began the year (including 2018). That’s 26% of the years, precisely what one should expect looking at even longer stretches of market history.
Our primary role is to empower clients to understand tradeoffs, make good choices, and resist blowing themselves up financially with “emotional investment allocations.” One practical way we accomplish this is through our BucketPlan™, as illustrated in the chart below. The BucketPlan™ allocates investment assets between three different buckets.
As you can see, we have named the buckets Consumption, Contingency, and Goals. Each bucket holds assets/accounts meant for a specific purpose and time frame.
For instance, the Consumption Bucket holds cash and short-term bonds aimed at paying regular living expenses anticipated within three years. No stock market funds are held in the Consumption Bucket, so this helps remove anxiety about short-term market pullbacks. This allows clients to plan for regular expenses without having to liquidate stock market investments at inopportune times. As an aside, the longest bear market on record in the U.S. market lasted 2.8 years and the average bear market over the eight bear markets since 1929 lasted 1.4 years on average.
The three buckets take into consideration both planned and unplanned expenses (thus the name for the Contingency bucket), as well as longer-term goals. Since the lack of clarity on goals is a major cause of anxiety, we not only help clients develop specific long-term goals, but adapt these along the way as priorities change. The BucketPlan™ Goals Bucket holds long-term oriented assets (globally diversified stocks) that correspond to particular goals that are generally 10 years or more in the future.
By mentally and physically separating your financial assets, you remove the urge to make knee jerk short-term decisions that ultimately harm your longer-term financial well-being. The whole idea is to avoid anxiety about the days by focusing on the years. Start there. Ready for a real conversation?