When it Will Fall?

The next big market crash might come tomorrow, next month, next year, no one knows. Anyone who does claim to know is simply playing a probabilities game until he or she gets it right. In other words, it is luck.
Jim Cramer for example, the famous host of Mad Money, shares stock picks every night but these stocks only returned 64.53% over the last 15 years (2001 to 2016) compared to 126.06% for the S&P 500 over the same period. He has a hedge fund manager background and actually invests in what he preaches but again, he cannot predict the market.
Cramer, unlike many other TV finance personalities, actually manages a stock portfolio that invests in many of his stock recommendations made on his television show Mad Money. — Jonathan S. Hartley, Matthew Olson
We do not know how the market is going to behave but one thing is sure; one day it will drop. When it will fall 20%, 30%, 40%… we will be ready. We are both too young to have lived through any major recession as investors but we are mentally ready to withstand these kinds of losses.
In 2008, for example, the S&P 500 index lost 37% and the Bloomberg Barclays U.S. Aggregate Bond Index, the benchmark of the Vanguard Total Bond Market Index ETF, gained 5.2%. That year, a 50% S&P500 and 50% bonds portfolio would have lost roughly 16% while a 70% stocks and 30% bonds mix would have dropped 24% and a 90% stocks and 10% bonds mix would have taken a 33% hit on paper.
These last two words are key; on paper.
The value of your portfolio would have dropped drastically but the only ones who actually lost money are the ones who sold. If you have the guts to withstand the crisis and stay invested, you will be just fine. The market has recovered, and more.
The go phase
We already talked about this in the past; if you are just starting out and in your accumulation phase, the best thing that can happen is a recession. Buying in a crash lets you enjoy a huge discount on high-quality investments. When others are fleeing, you can accumulate highly diversified investments such as index funds and stay put for the ride up.
Not only can you benefit from drops by purchasing more of your favorite funds but you can also magnify your returns with dividend reinvestments. Reinvesting your dividends is the easiest way to ride the wave.
The smell the finish line phase
When you are so close to financial independence that you can smell it coming, less than 3 years or so, a recession can hurt and push away your finish line a bit.
We suggest Personal Capital’s Retirement Tool. Try it for free today and see how your portfolio rates.
If you are close to attaining your number and wish to preserve some of your assets, financial planners usually say to increase your bond allocation. As previously stated, this will lower the volatility of your portfolio but can also decrease potential returns over the long-term. A 50/50 stock and bonds portfolio would have lost roughly 16% in 2008 but you need to keep the 4% rule in mind.
It is appropriate to advise […] a stock allocation as close to 75 percent as possible, and in no cases less than 50 percent. — William P. Bengen
Unfortunately, a bond allocation over 50% drastically decreases the potential longevity of your portfolio. Historically, withdrawing the 4-percent rule allowed a 50/50 portfolio to last at least 30 years under almost all periods since 1926 with a 96.6% chance of success according to FIREcalc.

Rates are at their lowest right now with returns of bonds far below the historical average of 5.18% but a strong stock allocation should prolong your portfolio’s longevity. Holding fewer bonds did historically increase total returns but a 100% stock allocation is certainly not for everyone. If you are not sure about your risk appetite, we suggest you try Vanguard’s risk tolerance-asset allocation questionnaire to get a rough idea or try Personal Capital for free today to dig even deeper into your finances.
The freedom phase
Now, if you are already in your withdrawal phase and enjoying retirement, a large decline in your portfolio might frighten you a bit more. Fortunately, you have a good nest egg to sit on and the 4-percent rule survived through almost all major crash in the past so you will most probably be fine.
- Stay on course
- Only cash out what you need
- Be flexible
If you had already planned to live off $36,000, for example, you could continue to withdraw such an amount but you could also be slightly more flexible in down years to lower your spending. You can always tweak your budget or start a little side gig to generate a small income if you are worried about selling a fraction of your portfolio.
It might sound crazy but you could even go for a long-term travel through South-East Asia to lower your spending! Enjoy the ride, Xyz.
Originally published on OurFinancialPath.com
