I’ve said on many occasions that you cannot time the market. You cannot predict the perfect time to buy or sell, much less guess correctly for both. There are approximately 250 trading days each year, and the market is up 66% of the time. You never really know if you are at a peak or a trough until it is over.

Likewise, you cannot time retirement. Sure, you can choose to retire when the time is right at work or when you feel you have enough money to retire. Unfortunately, you cannot choose to retire when the market is going to continue to rally for the next five years, as there is no predicting what the market will do. Financial advisers will warn you that market losses that happen in your first few years of retirement could have a significant effect on the income you receive from your portfolio by reducing the assets available to pursue growth when the market recovers. The risk of experiencing poor investment performance at the wrong time is called sequence risk or sequence-of-returns risk. While it is impossible to eliminate the risk of your investments being affected by a market downturn, you can mitigate the effects of sequence risk by adhering to the Ten Year Rule.

One of the biggest risks for any investor is selling assets to generate cash for living expenses when the market is down. Your financial plan helps you estimate what your spending needs will be for the next 10 years. I recommend doing this on a rolling 10-year period, so in 2010, you should have prepared for your needs in 2020. In 2011, you planned for liquidity needs in 2021.

Despite the “Flash Crash” experienced in July 2010, the market was up about 11% for the year. It is very likely some investors had gains that allowed them to move money out of the market into fixed investments that matured in 2020. The rest of their assets remained invested in the stock market for the long term.

Fast forward to 2020, and no one was expecting a pandemic and how the markets would tumble nearly 34% in 33 days. However, investors living off their fixed-income investments understood that they were not pressured to sell growth investments when the market was down, assuming they were using The Ten Year Rule. They knew they had 10 years of uninterrupted income provided by the fixed-income portion of their portfolio. Once the market recovered by September, they were again able to replenish money withdrawn from the fixed-income side for their spending needs in 2030. Had the market struggled for three years versus 33 days, investors who follow the Ten Year Rule still knew they could wait for a recovery before being forced to sell. Over rolling 10-year periods, stocks are up more than 90% of the time, giving you a chance to wait out any downturn.

This strategy, brilliant in its simplicity, goes to great lengths in reducing investor anxiety of retiring in a down market. Preparing for retirement is vital to the success of your portfolio. Investors who weathered the bear market of 2020 have been planning for 10 years or more. The customized financial plan they developed with the help of an adviser allowed them to estimate how much money was needed to weather the storm they didn’t even know was coming.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial and a co-host on “Money Talks”—your trusted resource for your money, your future, your life—airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

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