1) It Has Been a Heck of a Run
Many Average Joe’s have done well in the markets for an extended period. From the market low in 2009, the Standard & Poor’s 500 Index (S&P 500 Index) has averaged over a 15% annual return. 1) Even if you do not use the starting point of the 2009 low, it has been a heck of a run. Higher than the long-term average of 10%.
This is where the concept of regression to the mean comes in. What this means is that there will be times when the returns exceed the average. Which we have seen for an extended period now. Other times when it is below the average. Which we will see, we just do not know when.
With such outstanding returns since The Great Recession of 2007-2009 to the present, the regression to the mean comes in at some point. In the future, returns will have to be lower for a period to get back to the mean.
First, going forward, do not plan on these excellent returns you have gotten since The Great Recession. Second, strap yourself in, the ride may get bumpy.
In the movie Titanic, a lookout on the ship sees an iceberg and shouts, “Iceberg, right ahead!” While you may not see many icebergs, it’s important to keep your eye out for A Bear, A Bear, A Bear.
The definition of a Bear Market is a decline of 20% or more from recent highs. There have been five Bear Markets since the dot-com meltdown in 2000. The shortest Bear Market on record is from the pandemic in March and April 2020, it only lasted a long weekend 33 days. We will have another Bear Market. However, I do not know:
• When this it will be.
• How long it will be.
• How bad it will be.
But I do know we will have another Bear Market.
Therefore, use The Boy Scouts’ motto, “Be Prepared.”
Warren Buffett, Chairman and CEO of Berkshire Hathaway said, “Be fearful when others are greedy and greedy when others are fearful.” So, the question is:
Do you think others are greedy or fearful now?
2) Everyone Gets Older Every Year
Isn’t that the truth. In the U.S., over 10,000 people turn age 65 a day. 2)
A Day!
That sure is a lot more Senior Citizens looking for the local “early bird special.” With this, more people are moving from accumulation mode into distribution mode. Accumulation mode was contributing to your employer’s 401(k) plan, IRAs, Roth IRA’s and other savings vehicles throughout your working years.
Going into retirement means shifting into distribution mode. This means that you are possibly no longer saving any money. In fact, odds are you are taking distributions from your portfolio for some of your annual living expenses.
When taking withdrawals from your portfolio, remember the 4% rule. Correction, it is not a rule, it is a guideline. This was developed by financial advisor William Bengen in the mid 1990’s. This says that you can withdraw 4% in the first year of your retirement and increase this by the annual inflation rate. With a portfolio of 60% stocks and 40% bonds and following this 4% guideline, the portfolio should last about 30 years.
Even if you are not taking withdrawals yet, you must start taking distributions from your 401(k) plan and IRA’s when you turn age 73. This is called the Required Minimum Distribution (RMD). The distribution amount starts at about 4% of the fair market value from the prior December. This amount goes up every year as it is based on a life expectancy table.
Remember to take your RMD annually. There is a 25% penalty for failure to take your RMD. The good news is this is down from 50%.
That is not a typo.
The other good news is that the penalty declines to 10% if it is corrected within two years.
While there were tons of lessons learned from The Great Recession of 2007-2009 the biggest lesson was:
Sequence Risk Matters
Sequence risk, the risk of getting negative returns, gets elevated when you shift from accumulation mode into distribution mode. Regrettably, the market is going down and you are withdrawing funds from your portfolio to live off.
During The Great Recession of 2007-2009, the S&P 500 Index declined about 57% from its peak in 2007 to the trough in 2009. 3)
So, if you started with $1,000,000 it was now worth $430,000. Oh, and that is before you took any money out of your portfolio.
If that does not get you to do your Financial Lifeboat Drill now, I do not know what will.
How will you react if this happens? I cannot say for sure. However, I suspect:
You would act differently at age 67 than at age 37.
This is why you need to be proactive right now.
We have always recommended investing for when you need the money. That is easy to say, and easier to do when retirement is 30 years away. Much more difficult if retirement is 30 weeks away.
The reality is you will not need your whole portfolio on the day you retire. If you do, well, you cannot retire. Keep setting your alarm clock. You are going to need to keep working.
3) There are Actual Returns on Cash Now
Back in the day, there was an expression called TINA. This was shorthand for “There Is No Alternative.” Although this expression had been around for some time, it really gained traction after The Great Recession of 2007-2009. One of the government’s responses to this was to cut interest rates to near zero.
Then they artificially held them there for well over a decade.
Cash was, well, trash. With little to no return on cash investments, there was no alternative. The message from the government was clear:
Take risk.
Therefore, investors looked elsewhere. Correction, investors looked, well, everywhere. The most common of these were:
• Stocks
• Bonds
• Real Estate
• Private Equity
• Cryptocurrency
• SPAC’s
• Non-Fungible Tokens
The stock market gains are clear. The bond market recently had a sell off as the 10 – Year U.S. Treasury Bond Yield reached a recent new high in January 2025.
Real Estate has had both winners and losers. Residential real estate has turned into a housing crisis. The lack of inventory, soaring prices and elevated interest rates have made it challenging market for home buyers. All great for investors, difficult for prospective homeowners looking to buy.
Conversely, one of the outcomes from the Pandemic was the work from home (WFH) model. This has depressed the commercial real estate market in places like Chicago, New York City and San Francisco.
Now, large employers like Amazon and JPMorgan Chase are suggesting, asking, demanding employees are back working in the office. We will see where this goes.
Cryptocurrency had been on fire. Please…do not ask me to explain it to you.
SPAC’s have had more than their share of issues. So have non-fungible tokens. Whatever the heck they are.
Keep in mind, it is always important to remember Why You Shouldn’t Chase the Latest Investment Fad.
Cash Reserve Fund
Pre-retirees and retirees should maintain a minimum of 24 months of living expenses in their cash reserve fund. This will allow them to not have to make drastic changes to their portfolio when the market declines. This is the best defense against sequence risk mentioned above.
As mentioned earlier, the market will decline. We do not know when or by how much. But it will decline. Having this cash reserve fund will help you weather the storm.
Invest your cash reserve fund in a money market account. The primary goals here are to have liquid funds and not have any risk with the principal.
The benefit here is that now you can earn something on these funds. Although interest rates will vary, now you can get about 4% in a money market. Remember:
Cash is no longer trash. Cash is King!
Interest income earned is subject to income tax. Additionally, there is inflation to consider. The Federal Reserve Board uses the Personal Consumption Expenditures Price Index (PCE) to measure inflation. Their target has been 2% inflation. In January 2025, the annual increase was 2.5%. 4)
So, your real return, after taxes and inflation, will not be very much. That is OK. The goal here is:
Return of principal, not return on principal.
Action Item
Do your Financial Lifeboat Drill now! If you need help with this, give us a call at (860) 645-1515 or E-Mail Thomas.scanlon@raymondjames.com.
1) Finance.yahoo.com – March 9, 2021
2) Neilsberg.com – July 26, 2024
3) www.federalreservehistory.org – November 22, 2013
4) Bea.gov – February 28, 2025
This is original content written by Manchester, CT Financial Advisor, Thomas F. Scanlon, CFP®, CPA.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete, it is not a statement of all available data necessary for making an investment decision, it does not constitute a recommendation. Any opinions are those of Thomas F. Scanlon and not necessarily Raymond James.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Change in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
Great advice.