The title of this post was shamelessly borrowed from the Kitces.com post of June 17, 2022, in which Adam Van Deusen said,
“The key point is that advisors can not only serve as empathetic listeners during periods of market stress, but also serve as a reassuring force to remind clients how their plan was designed to weather tumultuous periods and help them achieve their goals.”
While we are not financial advisors and we don’t have clients, we do believe that our Actuarial Financial Planner (AFP) can be a very effective tool for helping users develop a plan specifically designed to weather tumultuous investment periods and to help them achieve their financial goals in retirement.
In his post, Mr. Van Deusen summarizes several interesting articles concerning this year’s market volatility, actions to consider in bear markets and putting money in perspective. These articles include:
- suggestions for helping clients “stay the course”,
- defense of 60%equity/40% bond portfolio allocations (and rebalancing as a buying opportunity),
- actions that advisors and their clients may wish to consider during these difficult times, including reading books and prioritizing sleep, and
- reasons to be happy and optimistic today, especially if you are good with numbers.
We encourage you to read the Kitces.com post. In our post today, we just have a few comments on it.
Staying the Course
We agree with Mr. Van Deusen that it is important for households to stay the course and stay with their plan during periods of stock market stress. We are pretty sure, however, that Mr. Van Deusen is encouraging you to stay the course with equities under a probability-based approach, while we encourage you to stay the course with respect to funding your future essential expenses with non-risky assets under a safety-first approach. As discussed in our post of June 6, 2022, we do not see the recent drop in the stock market either as a call to rebalance or as a buying opportunity for retirees. In this regard, we refer to the famous saying of Mr. Will Rodgers:
“If you find yourself in a hole, the first thing to do is stop digging.”
And while we agree with Mr. Van Deusen that
“…bear markets are painful for clients as well as their advisors (particularly those with AUM fee models, as a market decline reduces the asset base to charge on),”
under a safety-first approach, the household pain associated with bear markets involves reducing discretionary expense spending and not essential expense spending. We won’t comment in this post on whether the decrease in advisor fees (and the associated pain advisors experience) during bear markets possibly influences their recommendations with respect to “staying the course.”
Reading Books and Prioritizing Sleep
We are fine with any suggestion to read more books. We suggest, however, that utilizing a safety-first approach should already be more conducive to better sleep for retirees. In a recent NewRetirement.com group Facebook post asking whether members were worried about recent stock market decreases, we noticed that most who responded that they were not particularly worried had investments in non-risky assets (including Social Security, pensions, annuities and cash) that covered most if not all their expected essential expense spending.
Study Links People Who Are Good with Numbers with Higher Income and Life Satisfaction
We are not entirely clear how this article fit with the other two articles that tried to refocus readers away from thinking about their recently depleted portfolios, but the results of this study are certainly interesting and encouraging to this actuary. While Mr. Van Deusen implies that mathematically-inclined individuals may be better able to understand the probabilities associated with Monte Carlo models employing the probability-based approach, the AFP is also aimed at mathematically-inclined individuals who like to crunch their own numbers, so it is nice to know that we AFP users may also enjoy higher incomes and life satisfaction.
Conclusion
For many reasons, financial advisors generally prefer to promote probability-based approaches involving significant investment in equities. Actuaries and economists, however, prefer to match non-risky assets with essential spending liabilities utilizing a safety-first approach (also known as liability driven investing). This doesn’t mean that retired households that utilize a safety-first approach shouldn’t invest in equities (they should), but in order to avoid taking on too much investment risk, they need to focus first on funding their Floor Portfolio and second on funding their Upside Portfolio. Therefore, the phrase “staying the course” may have a different meaning to those who utilize the safety-first approach vs. a probability based approach during periods of stock market stress.
