But I Don’t Have Time to Make it Back
Many Americans may begin to walk proudly and carefree when stock prices climb, especially after a lengthy bull market run.
Taking on more risk may appear less dangerous. Strategic asset allocation can start to feel boring, and disciplined diversification may even be called into question because some asset classes outpace others. Many may even begin to lament not having all of their money in the winning asset class over the last year. Do you remember the mania when the Nasdaq gained 85.30% and 101.95% in back-to-back years in the late 1990s?
The fact that broad stock market prices correct all the time and have experienced many rough stretches during their historic long-term advance can feel like a distant memory.
And then…the market hiccups!
We experience a normal correction like the 13.4% “intra-year” fall in the price of the S&P 500 Index that we experienced from 1979-2019, and headlines in the news like, “This Time is Different” may begin to shake your confidence.
When this occurs, a common claim you’ve likely heard in the news from individual investors is:
“I’m worried. At my age, I don’t have time to make it back. Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 60 years old. I don’t have time to make up for any losses.”
Does this sound familiar? Have you ever had a similar thought?
If you have, you’re not alone. However, it may very well be unnecessarily in the way of you enjoying the Ideal Future you deserve.
Whenever stock market prices experience sharp corrections, the investment time horizon for too many Americans quickly shrinks. While increases in market prices can be typically met with apathy as I mentioned above, or reservation, i.e. “it can’t or won’t last,” sharp declines are often greeted with the gut feeling of permanence, i.e. “it sounds really bad this time. I don’t think it will ever come back in my lifetime!”
The “we don’t have time to make it back” claim can be interpreted as an indisputable fact that can govern your investment decisions leading up to and during your retirement years.
However, this “we don’t have time to make it back” feeling is not supported by facts. Let’s examine why I feel so strongly about this issue.
Long-Term Purchasing Power
We invest to solve a long-term vs. a short-term problem, and that problem is purchasing power.
Look at what you currently spend money on. If history is any guide, outside of a few items, prices will be significantly higher in the future if for no other reason than the stated goal of the Federal Reserve has an inflation target of 2% per year.
According to the U.S. Inflation Calculator, you need $13,193 today to purchase what cost you $10,000 in 2014, $16,534 if it was 2004, and $21,075 if it was thirty years ago.
Given this, in order for you to maintain your desired lifestyle, your income must increase substantially over your lifetime. This is not a want. This is a need.
In order for your income to increase, your retirement portfolio must also increase in value over time in order to generate the lifestyle-sustaining income you need.
In short, our shared problem is a long-term problem, not a short-term one. If your lifespan truly is that short as the quote suggests, stock market corrections may have no significance.
First, you wouldn’t own broadly diversified stock index funds because stocks solve a long-term problem.
Second, although potentially uncomfortable to think about, if you did own broadly diversified stock index funds and market prices temporarily dropped right before your demise, your beneficiaries could inherit and maintain ownership of your shares vs. selling them at that point.
How Long is Long Term?
With all of this talk about time, i.e. “I don’t have time to make it back,” let’s examine the data with regard to “long term” using Average Life Expectancy Tables.
Life expectancy for a 60-year-old individual is 25.2 years. However, the average joint life expectancy of a 60-year-old couple, i.e. the average life expectancy for the survivor in a 60-year-old couple, is 30.9 years, just shy of 91 years of age.
• For a 70-year-old couple, their joint life expectancy is 21.8 years (almost 92 years of age).
Take a moment to let these numbers sink in. Assuming for a moment that you are just “average,” where are you in these numbers?
For example, if you’re a 60-year-old couple, your number is 30.9 years, so your investment time horizon is 31 years! If you’re a 70-year-old couple, your investment time horizon is still 22 years, i.e. the length of time your retirement portfolio must last!
Stock Market Corrections
With your investment time horizon firmly in mind, let’s examine historical stock market corrections and specifically their duration.
Although every market decline can appear unique, the average bear market (peak-to-trough decline of 20% or more) in the S&P 500 Index since 1950 has lasted 12 months with an average drop of 33%.
The average bull market has been more than five times longer (67 months), gaining 265%.
Although bear markets feel like they last forever when we’re in the middle of one, the reality is they have been much shorter than most realize, and far less impactful compared to the long-term power of bull markets.
Investment Time Horizon
With your joint life expectancy and historical data of stock market corrections in mind, let’s now return to your investment time horizon to determine if the often-heard quote, “Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 60 years old. I don’t have time to make up for any losses” is valid for you.
Let’s assume for a moment that you have done your homework and identified what it costs to support your ideal lifestyle and how much of that must be withdrawn each year from your retirement portfolio (if any).
You have set aside multiple years’ worth (five is a safe number to start with) of your anticipated withdrawals held outside of your broadly diversified stock index funds, in defensive holdings (money markets and bonds) which historically have not experienced volatility levels like stocks.
You then strategically and broadly diversify the remaining balance of your retirement portfolio across a spectrum of stock asset classes using cost-effective index funds weighted toward areas of higher-expected return, and you allowed all dividends you receive to accumulate in your money market to support your anticipated withdrawals instead of being reinvested. (a very important distinction)
If you are a 60-year-old couple and your investment time horizon 30.9 years, is the “I don’t have time to make it back” statement accurate?
Fortunately for you, I believe the answer is no.
Even during challenging stock market corrections, it would be unlikely that you would have had to sell any of your broadly diversified stock index funds at a loss to free up funds to support your needed withdrawals because, in addition to allowing your dividends to build up in your money market, you would have already had five years’ worth of your anticipated withdrawals earmarked outside of your stock index funds.
The reality is your investment time horizon is a lot longer than you may think. If you strategize, fully grasp your joint life expectancy, and adhere to market principles, you do have time!
Knowing this should help provide you with a more confident path to spend what you have planned to spend despite what the current market conditions are at the moment which can help increase your odds of experiencing the ideal future you’ve earned.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories. Please also note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your accounts; and, (3) a description of each comparative benchmark/index is available upon request
Jack Phelps
Financial Advisor / Managing Director