We've been expecting this year's market correction to come for a while

If you're reading this article, you probably find yourself in the same situation as millions of Americans across the country: Your retirement savings have enjoyed a 10-year bull market and gotten fat in the process.

Then, a month or so ago (we're writing this in mid-March, 2018), the market went through its first major correction in 2 years — a pair of 1000-point drops and a period of market volatility we haven't seen in a while. Ultimately, the major stock indexes shed about 10% of their value, and quickly.

As you'd expect, we got a lot of phone calls from clients wanting to gauge our reaction as their trusted financial advisor — looking for assurances that they weren't going to have a decade of strong returns wiped out if things kept going south. We're guessing if you're reading this, you had the same thoughts as many of our clients:

  1. How is this going to affect me?
  2. Is it going to get worse?
  3. What does it look like, for me, if and when it does get worse?

A very brief look at last month's correction

Last month's correction was a result of investors being acutely aware that a decade of unprecedented growth isn't sustainable forever and looking for any sign that they need to pull back their stock-based investments. It more specifically appears to have been triggered by increased bond-yields and a couple of indicators of increased inflation, such as wage growth.

A typical investment portfolio includes a mix of stock-driven financial instruments (with higher risk and typically, higher rewards) and bond investments (a fixed, lower, but generally assured return) to help hedge against the risk of the stock-based investments. As bond yields increase (which they've been doing), investors are more incentivized to rebalance their portfolios - Putting a higher percentage of their investment portfolio into bond-type investments.

Naturally, rebalancing investment portfolios means selling stock-driven investments so those assets can be reinvested in bond-driven investments. When large volumes of investors do this at the same time (reacting to a bond-yield increase announcement, for example), the collective stock sell-off tends to drive stock prices down — classic supply and demand.

Corrections are a great reminder to make sure you've got a long-term plan

We're not going to dive into a discussion about market corrections. We'd probably bore you and break our promise about not throwing around industry mumbo jumbo. So in short, a correction is defined as a decline of 10% or more from a recent high in the market. Generally speaking, corrections relieve pressure. They're cyclical events that prevent stock prices from falling so out of step with investing fundamentals that they lead to more severe drops and long-term market downturns.

Summit Wealth & Retirement Partners works with our clients to develop and implement long-term financial road maps — not as day traders on their investment accounts, trying to magically time the market. In other words, if a 10% market correction means our clients take a short-term hit in exchange for long-term growth and stability, we see that as a good thing. And you should too, provided you have a sound, long-term financial plan in place.

It's happened before; it will happen again

Did you know?

Since the infamous Wall Street Crash of 1929 and the subsequent Great Depression, there have been 20 times when the market has declined 20% or more (a bear market) and countless market corrections (declines of 10-20%). Some have been worse than others, and it's likely we'll see more bad declines in the future. These are simply the natural ebbs and flows of the market.

The good news is that even the worst-of-the-worst bear markets have been short-lived when looking at the market over extended periods of time, and are almost always followed by bull markets that deliver sharp recoveries.

stock chart

What does that mean for you?

It means that if you were in your 20s or 30s and still in the early stages of your retirement saving, there wouldn’t be many scenarios in which you couldn’t weather another downturn, recession or even crash. Your time horizon (fancy investing term) would be long enough that you’d be well positioned to get through just about anything the market might throw at you over multiple decades.

But what happens now that you’re in your 40s, 50s, 60s or you're 10 years into the retirement? You have a shorter time horizon now and that potentially changes the story. We are not trying to scare you. In fact, we remain optimistic about the health of the market and the economy as a whole, but not being prepared for that eventuality could be a short-sighted, potentially catastrophic mistake.

Okay. What does your financial situation look like when the market suffers another major correction, a downturn or (gasp again), a crash?

The short answer is that everyone is different and the only way anyone can give you any sort of detailed financial advice is to sit down and start digging into what your unique situation is.

Hold on - This isn't a sales pitch. The article continues below with specific advice.

We don't want you coming away from this article thinking we were just trying to sell you something, but just so you know, we'll happily dig into your personal financial ecosystem at absolutely no charge.

We're fee-based financial advisors which means we charge a flat fee if you choose to work with us to implement your custom financial plan, and a very small percentage (1% or less) if you put investment assets under our management (our current clients trust us with over $500 million of their nest eggs). Moving on...

Actionable Advice

Mitigating losses
during a decline:
Stocks vs. Bonds

Confirm how your assets are currently allocated.

We find when working with new clients, especially over the last few years, that various factors have caused their stocks-to-bonds ratio to have gravitated over time to a mix that is heavy in stocks, perhaps to a point of being dangerous for those approaching, or in, retirement. Before you can calculate potential scenarios during a market drop, you need to get an accurate understanding of what your true mix is.

When we do this for you, we dig deep into your entire financial picture including non-investment assets, tax implications and much more. But for the purpose of this article, simply make a list of the statement balances of your stocks and bonds, then calculate what percentage each is of your entire portfolio.

If you're invested in a 401(k), mutual funds or other instruments that likely hold both stocks and bonds, you'll need to make sure you understand what the mix is there as well. For 401(k)s, you can generally contact your plan provider directly. For various funds, you can generally input the fund's abbreviation into various online tools to find the mix. We personally like Morningstar's Fund X-Ray.

Long story short, you need an accurate view of what your mix is to make any sort of meaningful calculations on the effect of a potential downturn.

Do a Rough

How would your portfolio have held up during previous market events?

There's a reason you see the "past performance does not guarantee future performance" disclaimer on pretty much any financial document. It's because past performance, positive or negative, isn't guaranteed to repeat itself. However, once you know what your mix of stocks and bonds is, you can at least use it for back-of-the-napkin calculations to see how your current portfolio would have performed during previous downturns.

Using 2008 as an example:

When the bottom fell out in 2008, the S&P 500 (perhaps a better overall indicator than the Dow Jones) lost 37% of its value. During that period, overall bond markets gained roughly 5%.

Using those figures and a 50/50 stocks-to-bonds mix to keep the math simple, your actual hit during the 2008 financial crisis would've been roughly 16%. Effectively half of your investment assets took a 37% loss (-18.5% against total assets) and half your assets gained 5% (+2.5% against total assets).

Now do the same calculation with your actual investment mix to see how your nest egg would've held up in 2008.

If you had $1,000,000 in a retirement investment account and the 50/50 mix used above, you'd have taken roughly a $160K loss in 2008's crash.

Closer to a 70% stocks/30% bonds mix? That same $1M would now be closer to $756K (a $240K loss). It's by no means a perfect calculation of your entire financial picture, but it at least lets you do some stress testing and get a high-level view of how a similar drop would impact your current retirement savings.

Nest Egg
vs Living

Now that you've estimated what you'd have left, compare it to anticipated living expenses.

When we work with clients to help them plan for retirement, we build out short-term (<10 years) and long-term (20-30 year) cash-flow models. This looks at what sources of income you can expect during retirement versus how much you will spend and what your tax liabilities look like.

The gap between your retirement income and what you spend needs to come from somewhere, and for most folks, that somewhere is your retirement nest egg.

So now that you have a back-of-the-napkin calculation on how big a hit your nest egg might take during another 20%+ drop in the market, you can start gaining some clarity on what a potential crash might mean for your ability to live the life you plan on living.

Would you like some help making accurate calculations?

Are you on
the right track?

Avoiding all loses is a losing proposition

History will repeat itself. The market will take another big hit at some point in the future. That might be another major correction, it might be a full-blown crash, recession, depression or otherwise. With near certainty, it will be all of those things at some point in the future.

The good news is that historically, markets recover even after the worst of the worst. In fact, they often present a fantastic opportunity to purchase very solid stock investments at a discount, further improving that recovery for your particular portfolio. The goal is to ensure you can weather the downturn.

The point is, if you're 20, or even 10 years out from retirement, you don't go killing the reason you invested in the stock market to begin with by trying to protect against every possible loss.

Even if you're close to retirement or 10 years into it, it doesn't mean your mix is wrong. You simply want to make sure you have an accurate picture of how different market conditions will affect your plan, and that your plan is primed to give you the life you want to live, even if the market doesn't always cooperate.

The point is, if you're 20, or even 10 years out from retirement, you don't go killing the reason you invested in the stock market to begin with by trying to protect against every possible loss.


Here's a look at a two different campaigns with a few notes on why I believe they're interesting.