Days like Friday can be stressful. A big drop in the market following a few bumpy weeks can send clients into a panic. Because money triggers strong emotions in all of us, it is hard to look at declining account balances and not be concerned. Unfortunately, when this happens on a Friday, we have all weekend to think about it. For the past six years, every time the market has started to reverse course, everyone wonders, “will this be like 2008 all over again?”

As you can imagine, in times like this we receive some inbound communication from clients. The subject line in the email usually reads “Should I be worried yet?” or “Stock Market!” For clients who have recently made a decision about a major money event, such as a pension election, or to retire, this type of bad day in the market only further amplifies the fear. Before we talk about what our reaction as advisors to these events is, let’s get some historical perspective.

First, we have had over six consecutive great years in the market. Since the market low (as measured by the S&P 500) on March 9, 2009 the S&P 500 index has returned 188% through last Friday. It was hard to imagine in March 2009 that we were about to begin a great bull market because fear had us paralyzed at that time. For many, it wasn’t until late 2010 that we actually allowed ourselves to believe “this might be for real.” By November 2010 though, before many of us felt confident in the market again, the rally had already recovered 79% of what had been lost.

Second, not all bear markets (defined as a 20% or more drop in several major stock indices) will become Great Recessions. From October 2007 until March 2009 the S&P 500 lost 56%. The recovery took about 5.5 years. Assuming that the market crash of 1929 through the end of WWII is counted as one big bear market, we have had a total of 12 bear markets through the 2008 Great Recession. The average drop was 37.5% and the average length was 1.2 years.  The average recovery period has been 3.3 years, with the longest being 7.5 years, and the 2008 recovery being roughly 5.5 years.

As your financial planner, if we react impulsively to these market corrections, then we have not done our job, i.e. planning. Planning is something that is done proactively, not reactively. There are a few very important things we have done in advance of today’s headlines.

One, we have discussed with you how much risk you can afford to take while still meeting your financial goals. This has been done in a series of steps, including some that are documented in your Investment Policy Statement, and others that are a derivative of our conversations and financial planning with you.

Two, we have worked to make sure you have enough capital reserves to weather the storm. We all have our cost of living, defined as the amount of money we need to live our respective lifestyles. We also have some form of income, whether it be salary, social security, private pensions, or public ones like STRS. The shortage, if there is one, is made up by our savings, or capital reserves. Those reserves are likely held in a combination of Cash, Bonds, and Stocks. We strive to make sure our clients have enough in cash and bonds to weather the storm.

We should always try to keep our short-term (0-2 years) needs in cash. Money for vacations, new cars, etc. should be readily available at the bank if needed in the next two years. Our more intermediate needs (3-5 years) are usually less specific or clear, but we know there are things we will want to do in the next 5 years that will require significant resources and that money should be in short-term high quality bonds, or safe assets. As soon as it becomes clear exactly what we are going to use that money for and when, we should consider moving it to cash. After that, we can invest for our long-term needs in a combination of bonds and stocks. Let’s apply some numbers to an example.

Let’s assume our lifestyle need is $96,000 per year, or $8,000 per month. Also assume our income sources provide $78,000 per year, or $6,500 per month. We need our savings to provide the difference, or $1,500 per month. Let’s further assume we have $600,000 between bank assets, investments and retirement accounts. That would represent a healthy 3% withdrawal rate from savings. Using our example, and trying to weather the storm, how should this person’s money be allocated?

  • $36,000 Cash (2 years of lifestyle shortage)

Now let’s invest the balance in a straightforward 60/40 strategy, with 60% in stocks and 40% in bonds.

  • $54,000 Short-Term Bonds (covers years 3-5 as excess contingency reserves)
  • $172,000 Intermediate-Long Term Bonds (provide stability when stocks are dropping)
  • $338,000 Stocks (volatile, would have dropped by roughly 56% in the Great Recession)

If we were positioned as such in October 2007, our stocks would have dropped from $338,000 to approximately $149,000 by March 2009. Yikes! However, we would not have had to sell anything, because between Cash and Short-Term Bonds, we had 5 years of capital reserves to cover our monthly shortage. We also had another $172,000 of Intermediate-Long Term Bond investments. That would represent an additional 114 months, or 9.5 years of capital reserves! Since we weathered the storm without panic, your stocks which dropped to $149,000 would have since recovered and would be worth approximately $428,000 today. Assuming you received modest earnings on your Bonds of 1.5% annually; your portfolio is now worth more than the original $600,000. Was it scary along the way? Sure, but instead of being reactionary, we merely implemented the plan we put  in place which allowed us to avoid irrational decisions when our emotions were running high.

When markets get volatile, please do not hesitate to contact us so we can review the plan we already put in place. Remember, these market corrections happen frequently and are short-term in nature, but we have built financial plans and portfolios to last for the long-term.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment, strategy, or product or any non-investment related content, made reference to directly or indirectly in this newsletter, will be suitable for your individual situation, or prove successful. This material is distributed by PDS Planning, Inc. and is for information purposes only.  Although information has been obtained from and is based upon sources PDS Planning believes to be reliable, we do not guarantee its accuracy.  It is provided with the understanding that no fiduciary relationship exists because of this report.  Opinions expressed in this report are not necessarily the opinions of PDS Planning and are subject to change without notice.  PDS Planning assumes no liability for the interpretation or use of this report. Consultation with a qualified investment advisor is recommended prior to executing any investment strategy. No portion of this publication should be construed as legal or accounting advice.  If you are a client of PDS Planning, please remember to contact PDS Planning, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives.  All rights reserved.