Lifeboat Drills

Lifeboat Drills

The last time you were on an airplane, do you remember what the flight attendants did before takeoff?  Of course you do.  They provided you with a safety demonstration on what to do if there is an emergency.  But I’ll bet that virtually nobody paid any attention to them because nobody ever does.  (Full disclosure: I also ignore the safety demonstration.)

If the plane has an issue though, there is no doubt that mayhem would ensue.  And rightfully so, I’d be freaking out too.  The reasons why are obvious, but one additional reason for the mayhem is because nobody on the plane will know what to do because they’ve been ignoring safety briefings for their entire life.

Why though?

I have to guess it’s because the possibility of an accident is so infinitesimally small.  It’s at least small enough to the point that nobody pays any attention whatsoever to the safety briefing.  In fact, according to data from the National Transportation Safety Board via curiosity.com,

Despite big-budget Hollywood films’ depictions of plane crashes, flying is actually the safest mode of transportation. In fact, the odds of a plane crash are one for every 1.2 million flights, with odds of dying one in 11 million. Your chances of dying in a car or traffic accident are one in 5,000.

Even if you’re reading this on an airplane while you’re rocketing toward the ground, your odds of surviving are quite good. Among passengers aboard crashed planes, 95.7 percent survive. And according to the National Transportation Safety Board, even passengers of the most devastating airplane crashes survive at a rate of 76 percent.

Given how statistically unlikely a plane crash is, very few feel the need to pay much attention to the demonstration.  And frankly, that makes sense.

Despite the statistics, there are many people that feel safer driving in their car than they do flying and yet they are 2,200 times more likely to die in a car accident.

Taking this issue one step further we know that driving a car requires our complete attention.  And yet, take a look around you next time you drive to see how many drivers are looking down at their cell phone.  (Hopefully, that’s not you!)

I’ll get to my point in a moment, but first a few facts about texting while driving from dmv.org.

  • 26% of all car crashes in 2014 involved cell phone use.
  • At least 9 people are killed every day because of a distracted driver.
  • More than 1,000 people are injured every day due to a distracted driver.
  • In 2014, 42% of teens say they have texted while driving.
  • Texting while driving is the leading cause of death in teens.

The drivers you see with a cell phone in hand are either totally ignorant to the risk of texting while driving or they believe they are such a good driver that they can use their phone while driving.  Perhaps they’ve gotten lucky thus far and therefore choose to ignore the risk at that moment.  But, we KNOW it’s dangerous to text and drive.  Okay, on to my point.

Investing isn’t that dissimilar.  When the markets are going up, everyone acts like they know what they are doing as if they are texting and driving.  We ignore the risks that we should inherently understand.  Even for investors that are seemingly aware of the risk, many take too much anyway ignoring the defacto safety demonstration – meaning they do nothing to prepare a course of action for when the market does fall all while taking more risk than they should have to begin with.

You’d think that people understand the “risk” that comes with investing in the stock market and yet, once a crash occurs, it’s obvious that many are unprepared.  One only needs to look at the fund flows to see the litany of mistakes that investors make at inopportune times.

And, here’s the thing.  We KNOW this is going to happen.  Here are some stats about the stock market from Ben Carlson’s blog, A Wealth of Common Sense:

Here are the frequencies in which certain loss thresholds have occurred, on average, in this same time frame:

  • 5% losses three times a year.
  • 10% losses once a year.
  • 15% losses once every two years.
  • 20% losses once every three to four years.

Average historical returns never tell the whole story because so few years or cycles ever follow the averages, but these numbers can be instructive. Stock market investors should expect to lose a little money quite often, see a correction occasionally, lose a decent amount every couple years and lose a lot of money on an Olympics-like schedule.

If history is our guide, and please note that it’s the only guide we have, we KNOW market downturns are going to happen.  The exact frequency or depth of the downturns we do NOT know.  Understanding that the market is predictably unpredictable is a start.

Lifeboat Drills

In an effort to help investors prepare for what’s ahead, I think one activity that would serve retirees quite well is conducting “lifeboat drills” with regard to their portfolio.  This drill is about protecting yourself from yourself and our natural proclivity to act inappropriately.

Review the scenarios of what a hypothetical 10%, 20%, 30%, and 40% equity decline would do to your portfolio.  You should also examine, perhaps even more importantly, how those scenarios would impact your psyche.  Knowing the approximated outcome, could you stay the course in each of those situations with your current portfolio allocation?  What would it do to your lifestyle?  What actions can you take today that might encourage you to stay the course?

What if you were prepared with a specific number of years of income in a much more stable asset class to depend on to maintain your lifestyle?  If you knew that you had 4-10 years of your needed income set aside for the deeper market falls, would that allow you to continue living confidently in your retirement?  For many people, ensuring that your lifestyle is minimally impacted in times of market downturns by having enough on the sidelines is all it takes to reduce the anxieties that typically accompany such an event.

Successful investing in retirement is not about eliminating the short-term uncertainties of the market.  It’s about preparing your portfolio and your emotional self to deal with those short-term uncertainties.  It’s about understanding where you could pull income from when one of those instances occurs.  It’s about truly understanding your income strategy so that you can have the confidence to keep living the life you always envisioned for yourself in retirement while the financial media tells you, “Don’t just sit there, do something.”  It’s about protecting yourself from yourself and our innate desire to react.

You do not get to choose the emotions you feel whenever this occurs, but you can choose how you respond in those situations.  As a starting point, setting yourself up to make fewer decisions during stressful times by knowing what your strategy is BEFORE a panic occurs is essential.  A retirement well planned is likely to be a retirement well lived.

And, one more reminder – please don’t text and drive.

 

What I’ve Been Reading:

Is Fasting the Fountain of Youth? (cnn.com) “At the end of the study period, participants on the FMD who were at risk for disease saw their fasting glucose, an indicator of diabetes risk, return to normal. Markers for heart disease, along with high levels of cholesterol and triglycerides, decreased, as did levels of the 1GF1 marker of various cancers. Additionally, participants lost abdominal fat, while preserving lean muscle mass and metabolism, which is often sacrificed on a lower calorie diet.”

The Stock Market Meltdown that Everyone Saw Coming (bloomberg.com) – “Go right ahead and feel free to try on any of your favorite after-the-fact-explanations about why markets fell. It really isn’t that hard. Just take your favorite pre-existing belief system and seek out facts that are consistent with that.”

U.G.L.Y. (theirrelevantinvestor.com) – “So if you were nervous during today’s sell off, maybe you’re taking too much risk, and if you weren’t nervous maybe you could afford to take a little bit more.”

The Case for Bonds (awealthofcommonsense.com) – “Rates are still coming off the floor and there’s no historical precedent for that so where things go from here is anyone’s guess.”

Life Expectancy Grows with Age (retirementresearcher.com) – “The idea is that your life expectancy continues to grow as you age, so that the number of expected remaining years in your life will decline, but it declines at a slower rate than your increasing age.”

Switching Medigap Plans is Tricky (squaredawayblog.bc.edu) – “I wish I’d known at the start that I was making a life-long decision” in choosing a Medigap insurer, he said. “I would have put in more effort and perhaps decided on a different plan.”

 

Thanks for reading!

Ashby Daniels

 

 

Disclaimer: Any opinions are those of Ashby Daniels and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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