Retirees, do you have an Exit Strategy when the Market goes down?
Pundits across the board will tell you as all of the stock exchanges around the globe are sliding downward, if you have a plan, stick with your plan. Does your plan contain an exit strategy? Many advisers will put together a plan during your accumulation phase that is based on the core financial principle that it is truly effective for the overall performance of a portfolio that there is a constant inflow of deposited money, especially when the market performance is going down. You don’t have to look any further than your own retirement plan where you made consistent periodic payments into your portfolio. As markets devalued, that simply meant that you were able to buy more shares of your mutual funds with the same amount of money and when the market goes back up, your portfolio will have that much more to realize the upswing of the market.
As you approach retirement, if you are not there already, your needs change from accumulation to distribution because you can’t count on consistent payments into your portfolio to buy on the downside. So one question comes to mind. Does the success of your retirement depend on the success of the market? If this is the case, what is your exit strategy you have in place? I am the father of 5 kids and we are that family which practices a fire drill. To save lives, practice your fire drill. How to get out of the house, where to meet that is safe and then when is it safe to go back in? Your exit strategy should contain the same principles you have with your adviser. If your portfolio, as a whole depreciates to certain predetermined limit within an agreed upon time frame then its automatic that you turn your assets into something else (safe area to collect and count your family members). All of this takes time, knowledge and expertise to find just how much there is to bear in your portfolio before it gets to a point where the downside of the market effects your decisions in the future.
As we continue with our fire escape story, there are certain things you do as a father to keep your family safe. You make sure that the fire alarms in the house are in good working order; you make sure that the fire extinguishers are inspected and are accessible; you make sure that all window ladders are functioning; and finally, everyone knows what to do (without thinking about it) in case of emergency. But the main thing to do, as a father, is to create a household or portfolio that cannot get to that point in the first place. If your success throughout retirement is predicated on the success of the market, even marginally you could have set yourself and your family up for disaster, especially without an exit plan. So as your portfolio is going down and you have to take distributions now you are going to counteract all of the risk and appreciation that got you a comfortable retirement.