Randy: we all worry about the market: is it going to continue to go up, or is it going to pull back? There's people who are optimistic about this year, but they say, you know what, the market does what the market does. This is Joe Fahmy, he's talking to the people over at Yahoo! Finance.
"People do have to keep in mind, this isn't all going to be sunshine and rainbows. For example, I still think we're going to see a pullback in the first quarter, an average correction of eight to 12% would be normal. Keep in mind, for the last 50 years the market has averaged an intra- year decline of 14. 5%, so a 10% correction would be normal, especially to shake out some of the excess bullishness that we're seeing."
Randy: So that's the big deal. People, they say, what's that market going to do, how much should I be in that market? It's kind of a casino crap shoot to me. How do I position myself? That's a big question, isn't it.
Ryan: It is right now, and again, it goes along with where we are in the economy, the market, as a country. There is a chance that there could be a pullback, I'd like to think that that doesn't happen, right? But one minor hiccup or a quick policy change could easily cause that maybe five to 10... I'm not sure it's going to be over 10%, but five to 10% pullback in the equity market, and that's why you want to make sure you're positioned well now. You don't want to make changes after that happens to your portfolio, because let's call it a 10% correction. At that point in time, you don't want to make changes, because there's a greater probability the market actually goes up from that point than there is today. So you want to make sure your portfolio, your investments, your retirement plan is actually updated now so you can sustain any potential corrections and it doesn't jeopardize your retirement.
Randy: I know I'm 60 years old and I'm getting toward retirement, so I'm watching that kind of closely. I'm watching my money go up, hopefully, and not pulling back, because it's so important. Is that what you see? People come in, are they watching it real closely and then, when they get into retirement, they go, you know, Ryan, I don't want to worry about this, I'm going to let you worry about this. I just want to have some kind of a strategy where I don't have to look at this every day.
Ryan: Yeah, that is what we're seeing, and it actually can be too late if you wait till retirement to sit down with somebody and say, hey, let's take a look at this, let's see if I'm positioned for the right amount of risk, given what the market's doing right now and rates and everything else. If you're waiting till you retire or even a month away from retirement, let's just say that you were going to retire in April of 2020, and what happened in February and March happened. All of a sudden, you have to start pulling money from your retirement plan, from your investments, right?
Let's just say you had a million dollars and you intended on taking a 4% withdrawal, $40, 000 from that investment plan, or your investments. Well, come April, if you had a correction, and let's just say that million dollars dropped to$ 800,000, in order to get that same type of distribution, you have to start pulling out a higher percentage, 5%. And 5%'s starting to trickle towards too high of a withdrawal rate from a portfolio to sustain over retirement years and not run out of money.
So you want to make sure everything's positioned right prior to retirement. I always say five, 10 years, you should really make sure assets are positioned appropriately, and as you're getting closer to that retirement date, you got to keep making changes and make sure those are invested appropriately, given how much you've saved, how much you actually need and where you are on that scale.
Randy: Well, there's a lot of people who are under the impression, you know, hey, I am all onboard with just don't lose the money. I do not trust this market, I see what it does. So what they do for their idea of protection is they have cash on the sidelines, and there are people that agree with that and there are some that do not. This is Jim Lebenthal, and he's on CNBC. He thinks it's a pretty good idea.
"This may seem like an overly simple answer, but I'd like you to have a little bit of cash on the sidelines to mitigate risk. Don't feel, with the stock market at record highs every day, that you need to have every single dollar invested. Hold 10, 15% cash on the sidelines. Now, I don't think there's a crash coming, but if you get a correction, then you're going to get the opportunity to buy stocks in all sorts of industries at attractive prices, so just hold a little bit on the side right now."
Randy: Your thoughts on that. Agree, disagree? Having cash on the sidelines, some people say, you know, you're getting nothing for your cash, why have it in cash? And other people say, this is a really good idea. What do you say?
Ryan: There's something to be said about having cash on the sidelines, and Jim Lebenthal, I think he's on the midday panel on CNBC four out of five days a week, so I watch him a lot. I agree with a lot of what he says, and this is definitely one of those things. So when you have in cash on the sidelines and the bank account, a lot of people ask us about this. "I have 150, $200, 000 in my bank, it's more than I want. What should I do with it?"
Right now, maybe a little bit different answer than most times, nine times out of 10 I may say let's keep it in there and let's come up with some sort of dollar cost averaging strategy into the market for exactly what he said.
I don't think there's a market crash coming either; there could be a correction, which is a little bit different, a little less of a drop in equities, but having cash on the sidelines serves two purposes if that does happen. Most people we deal with are gearing up for retirement or in retirement. One, if that market correction or, knock on wood, a crash does come again, having cash on the sidelines allows you to use that money and maybe not have to draw from your investment accounts and use that money for some of the current income so you can let your investment accounts recover from said market correction.
Randy: One of the things about it right now, though, is if you have money in the bank, you're getting literally nothing. You're losing money to inflation, you're going poor slowly, is what I've heard people say.
Ryan: It is, yeah, it is. But I think it provides more of a value in the future for that reason I just said. And then also, if there is a market correction, it gives you an opportunity to buy in at those lower prices, maybe it's five or 10%. Having the money in the bank, it is opportunity cost. You might be earning 0%, there's not many other areas that you can put it in because of the fixed income rates right now and where those are. So having it in the bank, as opposed to maybe investing in the market right now and then seeing the pullback at 10%, I'd rather 0% than- 10%.
Randy: Now, when you talk percentages, we talk about your average, classic, 60-40 portfolio: 60% is in equities, so it's money that goes up and down. 40% might be in bonds or cash, and that's money that is supposed to hedge against those market ups and downs. But if you also, at that point, that's what your 401( k) looks like and then you've got$100, 000 or more in the bank, now the money that is kind of idle is kind of out of whack as far as that percentage is concerned, wouldn't you say?
Ryan: Yeah, you got to look at everything. It's not just your 401( k). Your 401( k) might be 60-40, but you got to factor in your cash positions, if you have a significant amount of it, into the equation, and that would factor on the fixed income side and actually reduce the yield or return of your portfolio. So you want to make sure you adjust accordingly maybe in your 401( k), and maybe allocate a little bit more to equity, so maybe you have a 70- 30 split just in your 401( k), but when you're factoring in the cash on the sidelines in the bank account, it's actually maybe closer to 60-40 or even less.
We’ve always said that hope is not a good retirement strategy.
The Motley Fool says that another misstep is assuming some things about retirement are true…but many times they are not. Here are the top three:
Assumption #1 – You’ll spend less on living expenses
The facts show that many expenses will stay the same and some may go up like healthcare and entertainment. In retirement, every day is Saturday, and how much are you currently spending on Saturday?
Assumption #2 – Medicare is FREE
You are partially right. Part A is free, but the rest of the Medicare alphabet is not. There are parts B and D which you must to pay for. The Center for Retirement Research says the average retiree spends about 400 dollars a month on healthcare.
Assumption #3 – You Won’t Need Long Term Care
The typical American turning 65 has roughly a 70% chance of needing (some kind) of long-term care. Different levels of care and different states vary greatly but the average cost in the U.S. is about 7000 per month.
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