I’m a big fan of Jason Zweig, the Wall Street Journal investing columnist. His recent piece on bear market investing is a classic of financial communication: Use an easy metaphor to explain a difficult concept.
In this case, Zweig explains the widely known but mostly misunderstood concept of a bear market, times when stocks fall and stay down for long periods — by talking about actual bears.
Experienced hikers know that if a giant bear ambles your way the best defense is to make yourself appear large but make no sudden moves. Treat the market like a grizzly bear crossing your path in the woods, Zweig writes.
Making yourself look big is the equivalent of owning bonds in a portfolio, he explains. Making no sudden moves means talking to a financial adviser, calmly, before buying and selling anything.
I’ve been thinking about this advice because it squares exactly with our experience as a financial advising firm over the past few weeks. Once the market began to slip on COVID-19 news we made a concerted effort to reach out and call every single one of our clients.
It was a heavy lift, but we did it. Some, as it turned out, were experienced enough with past market declines to already be calm. “Call another client,” those folks told us, with a chuckle. “I’m fine.”
Others were not as calm, naturally, but nearly all of them were receptive to the fundamental message of no sudden moves. Our longstanding mission to continually educate our clients on the risk of emotional investing was paying off; most of them already “got it” and needed just a little hand-holding to stay on track.
But let’s get back to the bear. The “no sudden moves” mantra is pretty easy to understand. But “getting big” seems like something you must do, an action investors must take in the moment.
Not true, as Zweig ably explains. Many people nearing retirement don’t need to do a thing. They’re already big without realizing just how big. The reason is Social Security.
Many investors, even experienced investors, have a cookie-cutter idea of how much they need to own in bonds as they get older. They rely on formulas, usually the one where you subtract your age from 100, own that much in stocks and the rest in bonds.
Using that rule, a 40-year-old would have 60% of her money in stocks and 40% in bonds. A 70-year-old would be 30% stocks and 70% bonds.
Too little stock
Here’s the problem with rules of thumb: They only help some of the people, some of the time. For too many, one-size-fits-all advice can instead be bad advice.
For instance, if you work for 30 years you should expect a fairly robust monthly income from Social Security in retirement. If your spouse also worked, that only adds to total household income down the road. (It’s easy to find out this data from www.SSA.gov/myaccount.)
And what is Social Security but guaranteed lifetime income that adjusts for inflation? For couples with long work histories it’s the equivalent of owning a $1 million bond portfolio but one with no market risk, no maturity date and built-in inflation protection.
Nevertheless, many retirement investors completely discount Social Security in their planning. They know it’s there, but they ignore it. That’s the risk.
Let me explain: You need stocks in your long-term portfolio. Stocks power growth and that growth compounds. Bonds also grow and compound a little, but stocks are what really drive portfolio values higher over the years.
Own too much in bonds too early and your portfolio will grow slowly. You might feel better when the occasional grizzly bear ambles into your path, but you won’t be better off a decade down the line. It’s counterintuitive, but many retirement investors actually own too little stock.
Having a clear sense of how “big” your income portfolio really is — including the virtual bond portfolio you already own through Social Security — is the key. That’s why it’s vitally important to talk to a financial adviser regularly, not just when markets tilt and the bear appears.
A prudent investor knows exactly how much or how little danger he faces in regard to those long-term goals, and that means understanding the impact of proper financial planning on outcomes.