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Stuff Happens (Should We Worry?)

It is an unfortunate fact that so-called “expert” predictions concerning economic and geopolitical events often drive investor fear and/or greed to irrational levels causing them to act against their own best interest. On any given day one can tune into the financial news and receive a full dose of catastrophic predictions on inflation, oil prices, recession, interest rates, Christmas sales, government shutdowns, etc. This is not to say that some market predictions do not come to pass. A broken clock is right twice a day! However, the expert is yet to be born that has successfully predicted market turns with accuracy over any significant period.

Another group of “experts” tell us that all our problems will be solved if we just think “long-term.” To a large extent this is mostly true, but it is not that simple. As John Maynard Keynes, the famed British economist said, “in the long run we are all dead.” The risk of relying on the long-term shows itself in long-term periods of low or no returns, such as the “Lost Decade for Stocks” which lasted from 12/31/1999 until 12/31/2009. During this period, returns for the S&P 500 were negative. The Great Depression decade of the 1930s also failed to produce gains.

It is true that given enough time, if left alone, these portfolios recovered. But what if the investor does not have years to wait? Or, like most retirees, needs to take portfolio distributions during difficult markets to fund living and lifestyle needs? In this case, the long-term view must be paired with strategies that help offset “sequence risk.” Sequence risk refers to the danger that the timing of withdrawals from an investment portfolio may negatively impact its overall performance. This risk is particularly relevant for retirees who rely on their investment portfolios for income. The sequence in which investment returns occur becomes crucial, as a series of poor returns early in retire - ment can significantly deplete the portfolio and jeopardize its ability to last throughout one's retirement years.

HCM mitigates sequence risk using multiple strategies such as:

  • Adjusting withdrawal rates based on market conditions (HCM Guardrails),
  • 'Maintaining a discipline of diversification across asset classes and securities,
  • Incorporating dividend growth strategies to provide tax-advantaged income to fund portfolio distributions,
  • Maintaining documented financial plans to ensure all planned distributions are funded,
  • Incorporating bond-ladder protection to help fund cashflow needs during difficult markets when it is not appropriate to sell stocks.

By being aware of and actively addressing sequence risk, HCM clients can enhance the sustainability of their portfolios and increase the likelihood of a financially secure retirement.

Even with all this preparation, markets will behave irrationally, both up and down, which is where the long-term investors have it right. It is important to have a plan that incorporates the protections outlined above with well documented goals, since evaluating your progress against these goals is the only way to understand your success. So here we are, the Fed has increased interest rates to their highest level in more than 20 years to fight inflation, the economy is slowing, some experts predict we are headed into recession while others say no. Some experts predict a worsening bear market, while others predict a rally into year’s end and then into the election (as markets typically do).

There seems to be a lot of “predicting” going on. A task Niehls Bohr, Nobel Laureate in Physics, remarked “is very difficult, especially if it’s about the future.”

There was not a great deal of surprise earlier this year when US sovereign debt was downgraded. The fiscal situation of the United States is a ticking time bomb. How we will gain the political resolve to create and enact solutions remains to be seen. Things may need to get worse before they get better. No one knows. If they do get worse, it is important to remember that we have a plan, years of cash flow, protection strategies, and are patient, long-term disciplined owners of great companies. These companies have innovated through a number of financial and political crises in the past and have successfully weathered those storms. The S&P has been cut in half three times in the last fifty years and today it is 35 times higher than it was then because the great companies keep growing. Nothing should change about that!

So, yes – Stuff Happens, but we don’t need to worry.

Return to October 2023 Newsletter

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