The “News” The Media Missed Last Week
Good Morning Relaxing Retirement Subscriber,
I scoured multiple financial media outlets last week looking for a very important news item. Interestingly, as significant as the story was, I couldn’t find it reported anywhere so I thought I’d take the opportunity to share it with you.
Saturday, October 19th marked the 32nd anniversary of the single largest daily stock market crash in history. On that momentous day, the Dow Jones Industrial Average fell 22.6%, and the S&P 500 fell 20.5% in one day.
Yes, you read that correctly. 22.6% and 20.5% in one day!
To put a dollar value on that using nice round numbers, if the equity portion of your Retirement Bucket™ was valued at $2,000,000 on October 19, 1987, on the following morning, it was likely valued somewhere close to $1,548,000 assuming your holdings mirrored the Dow (unlikely, but useful for this discussion).
If evaluated in a vacuum without any historical perspective, it was not a very good day.
However, it was only a bad day if you reacted to it incorrectly!
On October 19, 1987, the S&P 500 Index opened at 282.70 and closed at 224.84, a loss of 20.5% in one day!
Exactly one year and a day later, on October 20, 1988, the S&P 500 Index closed where it opened one year earlier, at 282.88!
One year! That’s how long it took to rebound from the single greatest daily loss in stock market history.
What Can We Learn From This?
Given that the S&P 500 is within one percent of its all-time high on the heels of a 19.7% downturn in the 4th quarter of 2018, it’s more critical than ever to rationally and unemotionally evaluate the facts before the next downturn occurs and the financial media stirs the pot again.
In an effort to capture your attention, you can count on them to treat the next one as:
- “different this time”,
- “bigger and more damaging than ever before”, and
They have been wrong every time before, and it’s highly, highly likely they will be wrong again.
Despite what they want you to feel in order to capture and keep your attention and sell higher priced advertising space, the most important fact to ingrain in your mind is that market corrections and crashes are both normal and temporary.
As I shared with you in my book, The Relaxing Retirement Formula: Normal in that they occur all the time, i.e. now 92 pullbacks of 5% or more since 1945, (including August of this year).
And, temporary in that they last far less than most realize, with 89 of the 92 recovering in 14 months or less (including Black Monday above), and 80 of those 92 recovering in 4 months or less.
This second point might be the most important if the following thought has ever entered your mind, “but Jack, I’m getting up there in age. I understand what you’re saying about investing for the long term, but I don’t have time to make it back if we have another big correction like in 1987.”
My response to that statement is three-fold:
- First, as I outlined above, and used today’s Black Monday anniversary to highlight, all market corrections and crashes have been far more temporary than predicted.
- Second, here are the actuarial table facts on your longevity (and I might add that these are the averages):
- The average joint life expectancy (i.e. how long at least one spouse lives) of a 65 year old couple is 1 years, i.e. age 92.
- The average joint life expectancy of a 70 year old couple is 6 years, i.e. age 93+.
- The average joint life expectancy of an 80 year old couple is 5 years, i.e. age 94+.
Translation: even if you are 80 years of age, you DO have time!
- Finally, from a strategy standpoint at this critical stage in your life where you are withdrawing from your Retirement Bucket™ to support your desired lifestyle, you don’t want to keep 100% of your Retirement Bucket™ tied to the daily volatility of equities.
As I also shared in The Relaxing Retirement Formula, we recommend positioning five years’ worth of your anticipated withdrawals outside of equities, i.e. if you need to withdraw $7,500 per month from your Retirement Bucket™ in addition to social security and a pension, that’s $90,000 per year or $450,000 over five years you would hold in money markets and short-term fixed income instruments.
This is in addition to the dividends you receive which buys you an additional two years of cash flow on average. This allows you to invest the rest for the long term and position yourself to capture long-term expected market returns with complete confidence that you will not have to sell during a temporary down market for needed cash flow
As Vanguard founder John Bogle said in response to how he handles market crashes, “I get scared just like everybody else when market prices fall quickly. But, then I go and read everything I’ve written over the years to set myself straight!”
That’s pretty funny coming from a legend, but it’s very true and it’s great advice.
Committed To Your Relaxing Retirement,
The Retirement Coach
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I appreciate the trust you place in us. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)