One Bad Decision Is All It Takes

One Bad Decision Is All It Takes

There is a saying in professional golf that, “You can’t win a tournament on Thursday, but you sure can lose it.”  For the golf uninitiated, every professional golf tournament starts on Thursday and concludes on Sunday.  So, a good round on Thursday can put you in position to win with three rounds to go, but a terrible round on Thursday is likely to result in missing the cut and any chance at a paycheck.

Retirement planning follows a very similar outline.  Often, how you respond to what happens in the market early in retirement could very well seal your financial fate.  

When many investors get to retirement, they typically have the most money they’ve ever had, or at least close to it.  This being the case, coupled with leaving a steady job and the income that comes with it, this can be a point of maximum stress for many people.

A question I hear quite often from new clients is, “What happens if I retire and the stock market collapses right away?”  It’s a reasonable question.  Barring a significant health issue, this is probably the worst thing imaginable for most newly minted retirees.

Imagine for a moment that you’ve been retired for two years and there is a 30% market correction, how might you react?

It would be perfectly normal to panic and sell into the correction.  The fund flows show that this occurs time and time again (it’s at least partially to blame for why the average return for the average investor is so paltry.)  If you sold at the bottom, it’s unlikely that you would feel comfortable getting back in too soon.  Before long, your retirement portfolio has potentially missed a significant portion of the recovery.  

It’s unlikely that this is just a one-year mistake.  It is a mistake that could have compounding effects for the remainder of your retirement.  Your lifetime income could be significantly reduced, or you will likely run out of money should you need a specific amount.

Let’s take a look at two scenarios.

Scenario 1: Investor Does Not Panic

Below is a chart showing a hypothetical situation where an investor retired in 2007 and stayed invested through one of the worst declines imaginable for a new retiree.  Here are a few assumptions:

  • Years 2007 –  2017 reflect the returns of the S&P 500 Index including dividends.*
  • Assuming a 0% return for 2018 as this appears to be close to a likely outcome.
  • Assuming a 6% annual returns for the remainder of their retirement – a hypothetical return that I believe many retirees would be happy with.
  • Assuming an initial 4% withdrawal ($40,000 in year 1) inflated by 3% per year.
*This is a hypothetical example for illustration purposes only.  Actual investor results will vary.

As you can see from the chart above, despite the turmoil that occurred in 2008, the investor remained invested.  Not only did their portfolio recover, but over the long run, their net worth actually increased through the period. 

For what it’s worth, I realize that the hypothetical 6% annual rate of return in retirement is not what will happen, but this is simply an illustration of how just one bad decision early in retirement can have adverse effects for the entirety of an investor’s retirement all things being equal.  Let’s see how that one bad decision pans out.

Scenario 2: Investor Panics

Below is a chart showing a hypothetical situation where an investor retired in 2007 and panicked toward the bottom of the 2008 collapse – something that the fund flows show actually happened at significant scale.  Here are the assumptions for scenario 2:

  • Years 2007 –  2017 reflect the returns of the S&P 500 Index including dividends.*
  • Assuming a 0% return for 2018 as this appears to be close to a likely outcome.
  • Assuming a 6% annual returns for the remainder of their retirement – a hypothetical return that I believe many retirees would be happy with.
  • Assuming an initial 4% withdrawal ($40,000 in year 1) inflated by 3% per year.
  • Assuming that the investor sold toward the bottom of 2008 and was out of the market entirely during 2009 and 2010 at which point this client reinvested 100% of their portfolio.  This is an assumption that I believe to be quite reasonable because when an investor decides to sell out entirely, it generally takes a while to regain enough confidence to get back into the market.  Do you remember the phrase “double-dip recession?”  A lot of people missed these two years.

Please note ALL VARIABLES ARE IDENTICAL except the decision to sell in 2008 and subsequent sitting out for two years.  

*This is a hypothetical example for illustration purposes only.  Actual investor results will vary.

In Scenario 2, this investor’s one bad decision early in their retirement caused them to run out of money in the long run, despite all other variables being identical.  It can seem like a smart decision to get out of the market when your portfolio is deteriorating right in front of you.  At worst, it will feel like a relief to stop the bleeding, but you simply cannot know in advance when the market will turn around and continue its historical trendline northward. 

This is why it is critical that investors keep their wits about themselves and prepare for this scenario in advance.  (In my opinion, it also happens to be a significant reason that every retiree should consider hiring an advisor, but that’s an article for another day.)

Knowing market downturns are inevitable, what are some actions you can take to prepare yourself to make smart decisions while being scared to death during those tough times?  I have two ideas worth considering.

Establish Your Portfolio Income Strategy In Advance

I’ve talked before about the two-bucket approach with regard to income planning, but it bears repeating.  I generally help people plan for retirement using two buckets.

  1. An “equity bucket” to provide the long-term growth that is necessary to deal with longevity and inflation, but also to provide income during “good” market years.  
  2. A “fixed-income bucket” (preferably short-duration and high-quality in my opinion) to provide income during “bad” market years and on-going market downturns.  How much to invest into this bucket varies depending on the investor’s specific situation. 

These two buckets are designed to work together, but each with a distinct purpose.  When one is in favor, the other is just sitting there.  The key is to have a place to distribute the income needed in both good markets and bad.

Maintain an Investment Policy Statement

The purpose of an Investment Policy Statement (IPS) is to encourage good behavior during periods that would ordinarily induce bad behavior – most commonly during market meltdowns.  Encouraging a rules-based approach (which an IPS details) can help you make rational decisions rather than emotional ones.

Our proclivity to act is inherent in our DNA back to times when our survival depended on our instincts.  Unfortunately, our instincts do not typically jive with a long-term approach with regard to our portfolios.  In fact, during times of market volatility, our survival instincts are likely to work in direct opposition to our long-term financial health.  

“Don’t just sit there, do something” is our natural emotional state during times of market turmoil and often times, this might be the absolute worst thing to do to your future self. 

An Investment Policy Statement can formalize courses of action in advance of market unknowns.  What are some things that you might include in your Investment Policy Statement?  What might you say to your future self during an entirely rational time now to hopefully deter bad behavior when your emotional self takes over?  Here are a few items straight from the IPS I use with my own clients:

  • We will maintain a diversified portfolio of equities. Equity diversification divides the invested assets among portfolios with different styles, sectors and geographies, all of which have historically run on different cycles. And by virtue of rebalancing, something will always be”underperforming.”
  • We will not sell when the world seems to be ending (even if the markets are down 50%), as we believe the most dangerous words in investing are “This Time Is Different.”
  • We are forecast-free.  Because we do not believe it is possible to time the market, we will encourage you to make portfolio decisions based solely on your financial plan.
  • In general, all projected cash-flow needs over the next 6-8 years will be kept in cash/bonds.

Pretty straightforward, yes?

As you can see from the two scenarios above, the stakes are extremely high as just one mistake can cause irreparable damage.  The point of both of these strategies is to dilute the possibility of “relying on your gut instincts.”  The way I see it, setting rules for when you will or will not sell in various market environments is the closest thing that the average investor has to a retirement superpower.  

As you consider putting these two strategies in place, be sure to complete them when you are thinking rationally — not during a period in which the market is already going haywire.  Your decisions will probably be much more reasonable.

*S&P return data with dividends reinvested from YCharts.

What I’ve Been Reading:

The Rashomon Effect: What To Do With Narratives ( – “There’s no harm in consuming market narratives as long as we remember that most of them fall into the category of interesting, but not actionable.”

The Hardest Problem In Finance ( – Ironically, this is a piece in an extremely similar vein as the article I wrote above, but I hadn’t read it until after I wrote what’s above.  Michael is much better at charts than I am, so he has some really interesting data.

International Outlook: Are We Nearing Peak Pessimism? ( – “The relative return gap between U.S. and non-U.S. stocks is the widest in history.”

10 Things You Need To Know About 2018 Qualified Charitable Distributions (

Charitable Giving and Tax Reform ( – “While charitable contributions remain eligible as an itemized deduction under tax reform, the ability to actually deduct your contributions may have been impacted by some changes in the rules.”

The U.S. Just Became a Net Oil Exporter For The First Time In 75 Years ( – “While the country has been heading in that direction for years, this week’s dramatic shift came as data showed a sharp drop in imports and a jump in exports to a record high. Given the volatility in weekly data, the U.S. will likely remain a small net importer most of the time.”

Useful Tool I Found This Week – Will Be Added to Retirement Resources Soon:

A Really Detailed Tax Calculator from the National Bureau of Economic Research ( 

Thanks so much for reading, I hope you have a wonderful holiday!
Ashby Daniels

Disclaimer: The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Ashby Daniels and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. Holding investments for the long term does not insure a profitable outcome. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Dividends are not guaranteed and must be authorized by the company’s board of directors. The case studies presented in the material are for illustrative purposes only. Individual cases will vary. 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. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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