What if you could travel back in time prior to the 2008 market crash and warn all of your clients, family and friends about the certain impending stock market collapse? Think for a moment about how many families and businesses you would have been able to save as well as what this valuable advice would have done for your practice.
¹ In 2008 alone American’s lost $10.2 trillion, yes trillion, of wealth including $3.3 trillion of home equity, per Zillow, and $6.9 trillion in the stock market.
² In fact, on Monday, September 29, 2008 the one day 778 Dow drop caused a $1.2 trillion market value loss; the first ever $1 trillion loss day ever.
While we know we can’t go back in time to help avoid these past massive stock market losses we can take some practical steps today to help our clients protect themselves in the event we find ourselves in another 2008 situation.
Before we move any further, it’s important to point out that no one has a crystal ball; we can’t be certain if the stock market will tumble or if this bull market will rebound and continue to new heights.
However, we can look at the facts and make our best judgement. On August 22, 2018 the stock market surpassed its previous stretch and became the longest bull market in history. At the time many market experts predicted the stock market would only continue to rally from there.
While the S&P 500 set an all-time record on September 20, 2018, what happened afterwards was a fourth quarter filled with wild swings and tremendous volatility.
³ In fact, December 2018 was the worst December since 1931, falling more than 9%. In one 7 day stretch the Dow fell by 350 points or more 6 times. Christmas Eve was the worst ever for the index.
⁴ Ex-fund manager, Robert Rodriguez, who famously forecasted the dot-com bust and the Great Recession, was interviewed by ThinkAdvisor on December 18, 2018. He said regarding an upcoming financial crisis, “It’s virtually impossible to forecast the timing, but I think the probability is near certainty.”
He went on to say, “The odds of a recession are increasing. It could occur next year very easily. At the least, you’re going to see a growth slowdown. I’ve been watching this for a decade, and the numbers are starting to come together in terms of the excessive growth in leverage in the system [and other factors]. When we have a recession, it will likely be a worldwide one, and that will create other issues.”
Robert Rodriguez is not alone in his opinions on where the market is heading. Large financial institutions have been sending warning signs that we may be in for a rough 2019.
⁵ Last December, Pimco’s Chief Investment Officer, Dan Ivancyn, warned 2019 will be just as rocky as 2018, “The last few months have given us a sense of the types of risks that are out there, that both the economy and markets are going to face in 2019,” Ivascyn said. “At a minimum, like we have seen this year, expect ongoing volatility and that’s true across all segments of the financial markets.”
Now that we know the stock market hit an all-time high last year, and had a terrible 4th quarter which will likely face a tremendous amount of volatility and global uncertainty in 2019, how do we advise our clients from here?
The answer may be as simple as reallocating. Our clients are used to the term "reallocating" as they have been told as they get older, closer towards retirement, to shift their portfolio weight from more risky equities into more conservative assets.
The closer we get to retirement the more we need to reallocate to reduced risk vehicles to avoid stock market losses and sequence of return risk during income years.
We have also been taught the basic rule of investing (the blocking and tackling so to speak) is to buy low and sell high. While it is uncertain if the recent market highs will remain, if the stock market will grow from here or if we will see high amounts of ongoing volatility, we may want to advise a cautious approach for our clients; especially those who are nearing or currently in retirement.
Another way to explain this concept is to use the colossal ascent and decent of Mount Everest as a metaphor for retirement. For those familiar with Mount Everest, there is an area of the mountain above Camp 4 South Col called the ‘Death Zone.’
This is the portion of the mountain above 26,000 feet where the amount of oxygen is insufficient to sustain human life. As the name suggests, this is often where a majority of Mount Everest deaths occur. For climbers it is important to proceed with the most caution in this most dangerous part of the journey, especially on the ascent down.
We can equate the ‘Death Zone’ of Mount Everest to the 3-5 years leading up to retirement and the 3-5 years post retirement. This is the point of the journey when clients account balances are generally at their peak and when stock market losses are most devastating.
A slip or error in judgement in the Mount Everest death zone can be fatal. Likewise, stock market losses in the ‘retirement death zone’ can greatly reduce the probability of retirement success and getting down to the bottom of the mountain safely.
Both climbers and retirees are often so focused on getting to the top of the mountain they forget the most treacherous part of the journey lays ahead.
For those who are in, or approaching, the ‘retirement death zone’ may consider reallocating by simply taking some chips off the table so to speak. While every client’s situation is different, we believe annuities fit well for those who have accumulated money during working years, are now approaching the distribution stage, and looking for a way to replace a portion of the income they were earning.
At this point of the journey, our clients need to convert the money they’ve accumulated their entire working career into an income stream they won’t outlive.
Many annuities avoid stock market losses while also providing a guaranteed income for life. Think of the addition of an annuity as a way to reduce risk and increase certainty of an overall retirement plan.
How much to reallocate into an annuity depends a lot on the client’s risk tolerance, financial goals, available assets and retirement essential and discretionary income needs.
⁶ Annuity rates and benefits are fluid and largely based on current interest rates. Two years ago, the 10-year treasury hit an all-time low of 1.37% and annuity rates, caps, bonuses and income rider benefits plummeted. Since then the 10-year treasury has skyrocketed up to over 3% and has recently fell to roughly 2.7%.
Correspondingly, insurance companies have increased rates, caps, bonuses and income rider benefits. Right now, we have the opportunity to offer annuity products with the best rates and benefits we’ve seen in quite some time.
While we can’t go back in time to avoid past stock market losses, it is our job to communicate our message to as many clients as possible to help avoid them suffering another devastating loss.
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If you have any questions about as you watch the webinar, we encourage you to contact our team at (888)543-3776.
¹ Information gathered from: https://www.businessinsider.com/2009/2/america-lost-102-trillion-of-wealth-in-2008
² Information gathered from: https://money.cnn.com/2008/09/29/markets/markets_newyork/
³ Information gathered from: https://www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html
⁴ https://www.thinkadvisor.com/2018/12/23/bob-rodriguez-recent-market-turmoil-a-preamble-to-bigger-crisis/
⁵ Information gathered from: https://www.bloomberg.com/news/articles/2018-12-13/pimco-sees-flashing-orange-u-s-recession-signal-as-cycle-ages
⁶ Information gathered from: https://finance.yahoo.com/
The information presented here is not specific to any individual's personal circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Investments involve risk and are not guaranteed. S&P 500 is an unmanaged index of the shares of 500 widely held, predominantly large capitalization, U.S. exchange-listed common stocks. The index results neither include dividends reinvested nor reflect fees and expenses. The Dow Jones Industrial Average (Dow) is a stock market index that indicates the value of 30 large, publicly owned companies based in the United States, and how they have traded in the stock market during various periods of time. Investors cannot invest in any index directly. The discussion of any recommendations herein should not be assumed as an indication of future results. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendation(s). Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by carrier. Annuities are NOT FDIC insured.