Even a groundhog can’t predict the future
It’s February 2019. Most of us have probably broken or revised our New Year’s resolutions by now. After a few brutally cold days, the groundhog provided some optimism by predicting an early spring. In the markets, we had a negative 2018 but started off with strong January 2019 performance. And, just like the groundhog, we’re hopeful for that relief and will take any break we get, but we also know that there is no way to predict the future or eliminate risk.
A look back to 2008 losses to gauge risk tolerance
An interesting point about this year is that since fund fact sheets only show performance for 10 years prior, we will now see performance from 2009 on, and we’ll have to research further to find 2008 performance. Some may see this a good thing, as a time to forget that painful past. Frankly, I’m a little disappointed about the 2008 data dropping off the fact sheets. 2008 was a significant year in the market because, like the end of 2018, it was negative. However, for those that invested during that time frame, it was significantly negative – with the stock market indexes posting negative 30% or higher losses.
Why am I sad to see those numbers go away, filed away like some old historical fact? Because, I like to use them to gauge a participant’s ability to tolerate risk. While my goal is not to intentionally scare people or make them feel uncomfortable, I do tend to point the 2008 numbers out to see how they react and ask how they responded back then. Do people take the losses in stride, do they flinch, or do they shudder, remembering all too clearly how they reacted when they actually experienced it?
Balancing risk tolerance with retirement timeframe
How you reacted in 2008 should be a consideration for how to proceed now, but it shouldn’t be your only consideration.
You’re 10 years older now, which means 10 years closer to retirement (or even in retirement), so understanding your risk tolerance is vitally important. You might want to review your overall stock allocation if you’re getting closer to retiring – what if another 2008 were to occur the year you were planning to retire – would that change your investment strategy?
If you’re a younger employee and didn’t invest in 2008, I encourage you to review those performance numbers anyhow and make sure that you’re comfortable with them. Do you find them alarming? Then, you need to balance your risk tolerance with your time horizon and make sure that you’re diversified appropriately. But, if you’re somewhere in the middle – not a new investor, but not close to retirement – you should still review your risk tolerance and allocation periodically. How you invested 10 years ago may not be appropriate now. We’ve seen investor’s risk tolerances change once they marry, have children or experience other significant life changes.
Review your retirement account periodically
If 2018 had you concerned, don’t completely forget that and be overly optimistic with January’s performance. It’s still a good time to take a closer look and make sure that your retirement account is appropriate for you. In addition to your age, you need to remember a few things.
- First, retirement is a timeframe that lasts many years, typically decades. Most of us aren’t spending our entire retirement account in one day – we’ll take periodic distributions from it to last us throughout our retirement years. Having some stock exposure during retirement helps your account grow while you’re taking distributions, but there may be times when you need those stocks to rebound a bit.
- Secondly, our reaction to a negative situation is twice as high as a positive one. So while you may have panicked with your 2018 year end performance, you might not have even noticed that your 2017 year end performance was probably pretty good. Try to flip the perspective and look at your accounts when they’re positive – your reaction will be less emotional.
- And finally, you are ultimately in charge of selecting and reviewing your investments. Do what you feel is appropriate for you – not what your friends or coworkers are doing, not what you feel has to be “right for your age”, and definitely not what someone writes online.
Putting it all together
If you need a helping hand to get started, try a risk tolerance quiz and see what the results are (and save them to reference down the road!). Then, review with your financial advisor for additional assistance.
Melissa Varvarezeis, CFP™, is a Communications and Education Specialist at BPAS.