Patient or Impatient: Which One Are You?
Billionaire investor Warren Buffet is credited with saying, “The stock market is a device for transferring money from the impatient to the patient.” Patience may be a virtue, but the current bear market can make it difficult for even a level-headed investor to stay the course. As we enter the fourth quarter of 2022, inflation, food shortages, supply-chain problems, slowing growth and a host of other issues are trying the patience of financial-market participants.
Investors who are in the “accumulation” phase of life are well-positioned to take advantage of the discounted prices currently offered by the equity (stock) market. This includes the many workers who are contributing to employer-sponsored retirement plans through payroll deductions. It also includes people contributing to their own individual retirement accounts or even taxable investment accounts.
On the other hand, investors who are in the “decumulation” phase of life are in a much more precarious position. This includes retirees and non-working investors. Although it would be ideal to reduce or eliminate withdrawals until markets reverse course, this is not always an option. The cash flows provided by investment withdrawals are usually necessary to meet the spending needs of the investor, especially while inflation is taking a bigger and bigger bite out of those cash flows. Since many investors are in the decumulation phase, we need to discuss decumulation strategies that may improve the likelihood of success and reduce the stress of market downturns.
The basic premise for investing is simply this: risk versus return. Higher risk is often associated with higher returns over the long term. Although this sounds easy enough, higher risk can worsen investment outcomes in the short term, especially during times like this with increased volatility in the market. Decumulation strategies should target an expected return that exceeds the targeted withdrawal rate over time. It should also help mitigate investment losses by reducing volatility. Volatility and risk may be reduced with a well-constructed asset allocation that optimizes non-correlation among the risk levels of various asset classes.
The overarching principle for investing is you need to have a forward-looking, long-term focus. Anything, good or bad, can happen in the near-term. To mitigate loss of capital, have a long-time horizon and structure your overall portfolio to minimize the temptation to make changes in reaction to short-term events. For example, responding to a portfolio decline by reducing the portfolio’s risk level (a common investor behavior) can lower your expected return going forward. To help avoid this temptation, establish different accounts within your portfolio that represent different risk levels for the different time horizons over which the funds will be accessed.
Concern about outliving your money is one of biggest worries among retired investors in their decumulation years. Coordination of these concepts and complexities of a well-designed asset allocation that aligns with your decumulation strategy may be best handled by a trusted financial planner. Have a sound strategy, stick to the longterm plan, and seek professional guidance where you need it. With that advice, I will end this column the way it began, with a similar quote from Warren Buffet.
“So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls-but investors gain.’ Though writers often forget this truism, there is a buyer for every seller, and what hurts one necessarily helps the other.”
Wendy Bennett is a senior financial adviser at Bennett Associates Wealth Management in Butler.