31 March 2023

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Silver wealth and falling markets

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Market corrections and bear markets worry all classes of investors. Still, retirees are particularly penalized if their portfolios lose value, especially when they are about to enter the decumulation phase. In the face of this harsh reality, being told to remain patient is probably not much comfort. What to do, then? While there are no easy answers, you can look to recent history to learn some lessons. Adopting proactive household cash management has proven beneficial in the past. Similarly, significant changes in asset allocation have historically resulted in investors underperforming relative to the broader market.

Here are 4 tips that have helped many retirees cope with and overcome past downturns:

1. Cut expenses. It is good to reduce your spending habits and thus avoid decreasing your savings. A possible approach is to divide the budget into needs, wants, and desires and then consider downsizing the two categories. Giving up superfluous expenses will allow you to have more time margin and allow investments to recover;

2. Streamline income and expenses. When withdrawing from several accounts, knowing exactly how much you spend each year can be difficult. To keep track of daily expenses, it is better to have a single account to converge all the different cash flows. This will make it possible to periodically check the account to make sure that the total amounts of expenses are in line with the financial plan;

3. Create a two-year cash buffer. For retirees, the income cycle involves the sale of assets (sale of shares, real estate, etc.) and cash withdrawals. This is suboptimal for senior profiles: in declining markets, liquidating a greater number of assets is necessary to create the same income because one is forced to sell downwards. Instead, it is necessary to establish the level of liquidity necessary for the following 24 months and consider the provision of this amount in a solution with very few fluctuations (e.g., money market);

4. Don't distort your asset allocation. Although selling may seem like a wise choice in times of difficulty on the equity and bond markets, completely exiting these asset classes to switch to liquidity could be wrong for at least three reasons. First, market timing is a futile effort (you need to know when to sell stocks and when to re-enter the market. If momentum is lost, yields can drop dramatically over time). Second, rising rates won't automatically imply that bonds are a bad investment. Finally, increasing liquidity is not cost-free and makes assets particularly vulnerable during high inflation.