Winter Is Coming

This article on savings during retirement is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA

big tree covered in snow

Winter is coming up on the calendar, just like it does every year.  The squirrels will be gathering their nuts and the Snow Birds will be heading south.  In New England, some winters are harsher than others.  Through the years, I have definitely become a fan of mild winters. Weather wise, as we say a lot, we will see what happens.  Although it wasn’t the winters that recur annually on the calendar I was referencing. What I was referencing here was the Stock Market. Ah, yes, the Stock Market.  It’s been quite a ride, hasn’t it? Gathering some nuts (cash) may prove to be helpful.  While the weather should be better heading south, however, won’t be much help if it’s a harsh winter in the Market.

The Past

Historically, over long periods of time (no, not a long weekend), the markets have rewarded patient investors. The Standard & Poor’s (S&P) 500 average return over the past 30 years was 9.9%. 1)  It might be difficult but you need to think in terms of   decades here. Yes, decades. This is a challenge in our instant gratification society. And yes, you guessed it, patience, is the key word here. 

Regrettably, many of the newer investing tools and products don’t exactly support being patient. Naturally this got kicked off with online trading. Was that cool or what? Then we had the advent of Exchange Traded Funds (ETFs).  This vehicle allows you to trade during the day like stocks.  Mutual Funds don’t trade during the day. They are priced at the end of day.  This was then followed up by zero commission trades.  Then the pandemic hit and employees were trading online all day working from home. Then we had Robinhood (HOOD) offering ‘free-trades’ on their App. How convenient.  

We’ve now come to realize that HOOD was not an appropriate stock symbol. ROB would have been more accurate, right?  

Let’s not forget for a period of time during the Pandemic there was no gambling on professional or college sports.  While some gamblers migrated to online gambling, ‘investing’ in the stock market was a much more viable alternative. Regrettably, all of these combined developments certainly didn’t promote ‘patience’ as you and I would know it.  Clearly it was time for The Last Meme Stock.

The Present

Currently, there are, regrettably no shortages of issues. Inflation, rising interest rates and the War in Ukraine are just the tip of the iceberg.  The hits just keep coming when we bring up China and our current ‘leaders.’ I’ll leave the last one out of the conversation for now.  Keep in mind:

There is never a shortage of issues!

What is different here is interest rates. First and foremost, unlike The Great Recession of 2007-2009:

Interest rates have risen and are expected to continue to rise.

When interest rates were near zero for well over a decade, holding cash was not profitable, at all.  The saying had been that cash was trash.  The worm is finally starting to turn.  The Federal Reserve Board is now raising interest rates.  They have also indicated they would continue to do so.  By raising rates, they are attempting to cool off inflation, which reached 40 year highs. It appears they have more than a ways to go as inflation is over 8% and their target is 2%.  This means more rate hikes are on the way, for sure.

The Future

As Yogi Berra said, “It’s tough to make predictions, especially about the future.” True that.

With that said, market returns have been more than respectable since the Great Recession of 2007-2009.  To say the wind was at the back of the Stock Market is, well, an understatement. However, there is a concept called Regression to the Mean. This is a fancy way of saying returns, over time, tend to gravitate to the long-term averages.

As you know, everyone, and I mean everyone, is talking about the next Recession. Regardless of whether we are in one now or when it arrives, here are 6 Easy Ways to Navigate a Recession.  

Action Items: This is where the rubber meets the road. 

First and foremost:

Do not panic.

I know, easier said than done. One of the basic tenets of investing is:

Invest for when you will need the money.

If you are younger and just starting out in your career, you (hopefully) should not need the money in your 401(k) Plan or IRA for many decades to come.  Invest accordingly.  Also, for folks in this enviable position, follow Warren Buffet’s, CEO of Berkshire Hathaway (BRK.A), advice:

“Be fearful when others are greedy and be greedy when others are fearful.”

Younger folks will likely be given more than a few golden opportunities over their lives to capitalize on the Bear Markets when they occur. We don’t know when but we do know Bear Markets will occur. That’s the time to follow Mr. Buffet’s advice and, well, be greedy.

For more mature investors, you are more likely closer to Sunset than Sunrise.  I’m sorry about that. For what it’s worth, I’m also in this club. As Don Henley sang in The Last Worthless Evening, “But there’re just so many summers and just so many springs.” Enjoy them while you can.

This crowd may need to be a little fearful.  It’s not hard to see the others that are currently greedy.  Cryptocurrency and Special Purpose Acquisition Companies (SPAC’s) are Exhibits A and B respectively.  Be very careful about a SPAC Attack (What’s that?).  

You won’t have as many Bear Market opportunities as the young bucks to be greedy and, therefore, may want to keep some more dry powder. This is another term for cash.  So, it may be time to raise cash.  For this crowd, cash is not trash. Cash has gotten its crown back and now cash is king. To raise cash you will likely need to sell some stocks and bonds. The current returns on cash won’t have you doing cartwheels down the aisle. That’s OK. With the rise in interest rates, now you can get a return of your principal and, as modest as it may be, a return on your principal. Pre-retirees and retirees should increase their cash reserve fund to at least two years of living expenses.

  1. – July 22, 2022