There are plenty of technical planning topics that can add value to your financial life that range from tax optimization to long-term care planning to estate planning. But if you blow up your portfolio, each one of those planning areas is exponentially worse off which is why I write so much about the simple value of staying the course through all markets.

Imagine that around March 23rd of this year, you gave up the ghost and pulled your money out until “normalcy returned.” This wasn’t an uncommon decision as fund flow data from the Investment Company Institute shows this to have been the case.

Perhaps unsurprisingly, funds flowing out of equities were the highest at the lowest point in the market.

If your portfolio was worth $1M at the start of 2020 and was a very vanilla 70/30 portfolio of the S&P 500 and short-term bonds, it would have dropped by about 21% down to ~$790,000 by March 23rd.

Now let’s say you reinvested your portfolio around the time the market hit 25,000 again feeling like the worst was behind us which was around the start of June. Mind you, this would have been a monumental decision to make because most people did not seem to think the worst was behind us at this point - some people still don’t. But let’s say you did make this decision and reinvested back to your 70/30 portfolio. During the time you were sitting on the sidelines, this 70/30 portfolio would have rebounded by about 25% or approximately back to the $1M you started with.

Perhaps thanks to the COVID markets, you learned a valuable lesson and manage to stay the course through all markets from this point forward recognizing that timing the market is close to impossible. Some would say this would have been a $200,000 lesson given the subsequent growth that was missed out on for just that two-month period. But was it just a $200,000 lesson?

If we assume that a typical 70/30 portfolio over the coming 30 years (a typical retirement) will return just six percent - which could be higher or lower of course - how would your financial life have been forever altered by this one single instance of capitulation?

Using a simple compound interest calculator, the difference of the ending values (and assuming a distribution of $40,000 per year on a simple basis) between these two hypothetical investors would be as follows:

Stay the Course Investor: $2,581,000

I Learned My Lesson Investor: $1,375,000

So, as it turned out, this wasn’t a ~$200,000 lesson learned, but a ~$1,200,000 lesson learned.

This is why I spend so much time emphasizing the value of staying the course through all market cycles, practicing rationality in the face of uncertainty while continuing to be optimistic about the future, and why it’s so important to think differently about risk in retirement. Because while it’s fun to tell clients that they are “optimizing things” which is a sexy value proposition, I believe it pales in comparison to the value of the encouragement to stay the course through all market cycles. To me, this is the true value of having a written retirement income plan that supports portfolio recommendations. A portfolio without a plan is the proverbial tail wagging the dog.

For what it’s worth, I realize I made a number of assumptions in this post, but the point is no less valid. There are always plenty of investors who sell at inopportune times and struggle to decide when to get back into equities. For those who finally make their way back, I am hopeful that there is a lesson to be learned and that these investors will heed the wisdom earned from their experience.

Stay the course,
Ashby

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This post is not advice. Please see additional disclaimers.