SHOW NOTES: 2020-03-05 MiM

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Last Week’s Question of the Week: What is the most popular age for people to begin claiming their social security benefit?

ANSWER: Age 62.

HOST: I assume that one of the things that makes a lot of people nervous with their retirement planning is when they see volatility in the markets like this past week? What’s the best way for people to handle volatility?

KLAAS FINANCIAL: We know these past couple of weeks has been a little nerve racking for some people. So, we do like to address the topic with a little recent history and some facts.

REMARKABLE RETURNS: There is no question that after coming off a year like 2019 which was an exceptional year in the market where the S&P returned over 30%, a milestone that had only happened in eight of the last 40 years going back to 1980.

SLOWING GROWTH: Despite strong market returns in 2019, economic data around the globe slowed throughout 2019, leaving corporate earnings down.

HIGH VALUATIONS: There was multiple expansion in 2019, meaning that stock prices appreciated at a far faster rate than companies grew their underlying earnings. As a result, valuations of stock at the end of 2019 looked expensive compared to history. Using valuations allow us to understand the balance between risk and reward. When you bring in the uncertainty of the Coronavirus this adds more caution to investing and managing a portfolio.

COMPARISON: When we look back in history of the 2003 SARS outbreak which had over 8000 confirmed cases but had a higher fatality rate than the current Coronavirus BUT mainly affected the Chinese Economy, it did not change the uptrend of their economy at that time, and ended up having a very minor effect on China’s GDP. Tourism, transportation stocks took the brunt of the financial impact. While SARS did not have a large impact on the US market then, today China is a larger contributor to the Global GDP today, so the Coronavirus could have a larger impact on the global economy and the US stocks today. It is uncertain as to how many people the virus may affect at the peak of its lifecycle and when it will be contained, so this makes it difficult to estimate the total market impact accurately.

HOST: What about volatility and/or a correction occurring when I am within a couple of years of retirement?

KLAAS FINANCIAL: That is never is ideal, nor does it feel good which we completely empathize with.

Here are some things to remember:

  • You haven’t lost any of the shares of the stock you own, when the market corrects/declines — you only lose shares when you sell them. A lot like a house, you haven’t lost anything on a house until you SELL that house in the middle of a real estate downturn.
  • Also, remember that you cannot “time the market”.
  • Backing off risk. Ideally, we would like to see our listeners backing off risk in their portfolios in the last couple of years prior to retirement. That doesn’t mean their monies are sitting in cash but that we would like to ideally keep what they have, while also providing the opportunity for more growth, with of course additional contributions.
  • Remaining in Your Positions. If you haven’t backed down the risk, we would likely suggest that you REMAIN in your positions vs. selling to
    cash and seek out a professional opinion. If you are selling out on the way down, you are likely not to be sitting well when the market does return.
  • The definition of a market correction is when the market falls 10 percent from its 52-week high. A pullback allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle.
  • Corrections can occur in any asset class. Stock market corrections are an inevitable part of investing. Historical analysis shows these corrections result in a 13% decline and take about four months to recover to prior levels, on average. But there’s one big caveat: this is only if it does not fall into bear market territory, down 20% from a high. If the losses stretch to 20%, then there’s more pain ahead and a longer recovery time.
  • Remember that the S&P Index, since its inception in 1926 through 2019, has returned a historic annualized average return between 8-10%. While that average number may sound attractive, timing is everything — get in at a high or out at a relative low and you will not enjoy such returns. Also, keep in mind the truth in this mantra: past returns are not a guarantee for future results.

  • HOST: So how does one best prepare for a Stock Market Correction? Or in this case, since we have experienced one, what should we do now?

    KLAAS FINANCIAL: Here are some recommendations:

    1. Identify your investment goals.
    2. Have a strategy. You’ve probably heard of dollar-cost averaging, a strategy of investing a set amount in the market at periodic intervals.
    3. Invest periodically but use decline thresholds instead of time intervals to determine when. For example, you might put a set amount into stock funds in your 401(k) after every 5% dip.
    4. Honestly evaluate your OWN risk tolerance.
    5. Evaluate your investment profile’s diversity.
    6. Invest in things you understand; and understand BOTH THE RISK and the FEES that are associated with these.
    7. Remember to Simplify, Consolidate, and Diversify your retirement investments.

    From the Money in Motion Listener Question Corner, Amy wrote in with the following question: “How can I protect my 401k if we do go into a recession?”

    KLAAS FINANCIAL: Our best suggestions:

    • Don’t stop contributing to your 401k.
    • Resist the urge to sell.
    • Never try to time the markets.
    • Remain diversified.
    • Don’t look at your account balance.
    • Stick with your plan.
    • Get help if you need it.
    • Don’t panic — volatile markets do not last forever.

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    Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.