Everyone in line laughed, partly because Megan was utterly adorable and partly because it is simply common sense that there is no point in fighting the fundamental nature of the thing. The ride goes up and down. That’s what it does. If you don’t want to experience that, you don’t get on the ride.
Markets are by their very nature volatile. Bear markets are inevitable. They come along quite frequently, about every five or six years depending on whom you ask and how they measure things. “Corrections” of at least 10% happen on average every other year or so. Over a 30-year period, we are looking at five or six bear markets and around 15 corrections.
Given that markets have declined so frequently, how is it possible that anyone can ever retire? Clearly, there must be a way. Millions upon millions of people have retired, suffered through terrible market environments and managed to avoid financial devastation.
There are many things that can be done. First and foremost, of course, is that you should not bet the farm on the short-term gyrations of the market. Beyond that are all the clichéd, boring things we financial planners should be talking about. Have a reserve, save for retirement, manage spending, manage debt and diversify the investments.
Instead of feeding the fear, we should be emphasizing that bear markets are not to be feared—they are to be expected. “It just goes up and down.”
Most important, if bad markets are expected, we can plan for them. The issue should not be what the market will do. The issue should be what will the client do when (not if) the market tanks. It is much better to decide what to do ahead of time than scramble to figure it out in the moment. Few will decide that selling low or panicking is going to be a good move.
Recessions
For workers and business owners, it makes sense that economic conditions would be a concern. Their livelihoods depend upon a certain level of business activity. Their best defense is employing the same fundamentals I just talked about—by having a plan that includes having a reserve, saving for retirement, managing spending, managing debt and diversifying the investments.
For retirees, fear of a recession makes less sense. Retirees don’t get laid off. Often, what happens is the retiree makes an assumption that recession means a bear market. That has been true sometimes, but the correlation is not strong enough to rely upon. Heck, economists can’t even agree when a recession started and stopped months after the fact using hindsight.
Do your discussions of economic conditions contribute to client worry about whether a recession is nearing? Are you unwittingly encouraging clients to extrapolate economic concern into a bear market prediction? Stop that and redirect your emphasis. Again, it doesn’t matter much why the markets decline but it matters a great deal what clients do in reaction to the declines.