Preparing for the Unexpected

financial planning experienceDoes anyone really NOT know how to fasten a seat belt on an airplane? Still, every time you get on a plane, you know you’re going to get the safety instructions. If you speak to airline employees they will tell you that it’s all a part of being top-of-mind in case of an emergency. They may further add that if something goes wrong during the flight people typically panic and act irrationally. Being reminded recently of what to do helps people do the right things in a crisis and prepare for the unexpected.

I will attempt to do the same for our industry. I am choosing this month for this lesson because the U.S. stock market has been on a nice upward trend the past few months until we hit a recent downturn a couple of weeks ago, which may be a bit scary, especially for retirees.

Here’s our wealth advisory safety briefing:

1. The average 62-year-old couple has a joint life expectancy of 30 years. See: Your Next 30 Years

2. People make emotional decisions and it’s important to strap on “emotional seat belts” to help manage them.

3. Stock and bond markets go up and down in the short term, but have trended up in the long term. See: Buy and Hold Investing

I have gathered some data to help provide perspective. Loring Ward, our portfolio management partner, analyzed the S&P 500 data of monthly returns from 1926 through 2012, which means we have 1044 monthly returns, and more specifically we have 58 thirty-year periods from January – December we can use to look at an average 62-year-old couple’s investment experience.

To see what a 30-year investment experience looked like I wanted to know the annualized rate of return over the 30-year period as well as the number of 10-15% declines, 15-20% declines, 20-25% declines and declines greater than -25%.

On average, there are 6.5 declines of greater than 10% over the course of a 30-year investment period — or once every 5 years. The flip side of that coin, however, is that the annualized rate of return over the 30-year periods range

from a low of 8.5% from 1929-1958 to a high of 13.7 from 1975-2004. Both of those numbers fit within the expected long-term rate of return used by most financial planning software including the software we use at Fonville Wealth Management.

As a fiduciary (See: Brokers vs. Fiduciaries), we use this information to help our clients prepare for these three realities:

1. The money has to last longer than you may think. The average 62-year-old couple will need their money to be around for at least 30 years, so keeping a long-term perspective is essential. Historically, the stock market, as measured by the S&P 500, has ranged from 8.4% to 13.7% over calendar-based, 30-year periods.

2. People will be emotional when it comes to their money and their future based on current situations. Stock and bond markets have steep declines and quick rises which tug at two powerful emotions: fear and greed. We believe our #1 job is to manage these emotions so as not to derail our client’s long-term objectives. See: Your Worst Enemy When It Comes To Investing.

3. Stock and bond market declines have occurred — and will continue to occur — frequently. The more time we spend understanding and practicing this, the more likely we will keep our “emotional seatbelts” on during the next period of stock market turbulence, and stay seated until the ride levels off. Much like in airplanes, sometimes just staying in our seat, is the best course of action.

Bottom line, expect down periods. Expect a 30-year investment horizon for the average 62-year-old couple. And stay seated during market turbulence and heightened emotions.

Special thanks to Steve Atkinson at Loring Ward for providing much of this content.

About the author: Katherine Fonville is an independent, fee-only Financial Advisor in Richmond, Va helping clients with investment management, retirement planning, college planning, and financial planning needs.