First thing I’d like to say that our thoughts and prayers go out to those affected by Hurricane Harvey. We just saw a real-world example of how things can change in an instant. One moment everything’s fine, the next, we’ve got total devastation in some areas.
Of course, with natural disasters like these, Mother Nature will often have the final word, regardless of how you’re prepared. But with investing, you may find that the better you’re prepared for market swings, the less of a negative impact there might be.
Here’s a little math for you. During the accumulation phase of your life, where you’re still working and contributing to your retirement accounts, if your portfolio suffers a 10 percent loss, it will take an 11.1 percent gain just to get back to even. With a 20 percent loss, you need a 25 percent gain to break even, and at 30 percent, it requires a nearly 43 percent gain to break even.
But what happens when you’re retired and taking withdrawals from a volatile portfolio? It’s even worse. If you had $100,000 and took out 4 grand per year, and your portfolio suffered a 10 percent loss in year one, you’d need about a 21.4 percent gain in year two to get back to even. Using that same scenario but taking out $6,000 per year, you’d need about a 27.2 percent gain in year two to break even. That is NOT easy to do.
This sequence of returns can have a devastating effect on your portfolio. This risk is of primary concern to us, and it’s why we use a Bucket Strategy, where we take short-term distributions from less volatile assets. Whether the market is up, or down, or somewhere in between, your income source is designed to be unaffected by those gyrations, potentially avoiding this sequence of returns risk.
When market downturns strike, like natural disasters, they may do so with little or no warning. So it might be time for you to think about what YOUR strategy is. If the stock-market version of Hurricane Harvey arrives and you’re not prepared for it, it could take many years to recover. What’s your plan?