A chance to reset?

S.F. Ehrlich Associates |

August 15, 2020

If you spent the past five months in lunar orbit and recently opened your brokerage statement, your reaction was probably akin to ho-hum. For the rest of us mere mortals, it’s been an incredible whipsaw. Lacking sports and social lives, watching the stock market became its own entertainment.


With industries shedding jobs by the gazillions and retail stores closing at a record pace, one can certainly understand if you have some doubts about the recent market recovery. In fact, conjecture about the disconnect between Main Street and Wall Street is widespread, though there are reasons to explain how this has occurred and why it may even continue. On the other hand, many are probably speculating how long until the market collapses, yet again. 


Whether you believe the economic recovery is taking shape or that we’re a day away from financial doomsday, you might be wondering whether or not you should turn your beliefs into actions. Rather than spending time wondering how the market got here or whether or not it will stay at this level, think of the market recovery as an opportunity to reflect on how you felt when the market took that awful drop in March.


If, for example, you didn’t pay any attention to your portfolio because you’re committed to investing for the long haul, then you may have already answered the question. Alternatively, if your reaction to the slide in the market was closer to panic and sleepless nights, it might be time to reassess your risk tolerance. In other words, with the market and your portfolio resetting back to near pre-COVID levels, it might be worth discussing whether you should move to a less volatile mix of holdings.


Taking risk out of a portfolio comes with potential consequences. A portfolio with less volatility is built with more dollars going into fixed income. With interest rates at or near historic lows, one consequence of reducing risk is an expectation of less income generated by bond funds.  Cash investments, for example, to include money market funds, are paying virtually no interest. Even ultra-short or short-duration bond funds struggle to pay interest worthy of mention. Relative to stocks, however, they’re considered ‘safer’ investments. With current returns from fixed income far less than the historically higher returns generated by equities, less risk may be costly.  


The follow-up question, of course, is how much growth do you require? Using a simplistic example, if you have $1,000,000 in your portfolio, withdraw $50,000 year, and have a life expectancy of 20 years, you may not require a lot of risk. If your portfolio is currently invested 50% in equities and market volatility cost you restless nights back in March, then you might be able to modestly move the volatility meter by allocating more money to fixed income. Consequently, that probably means fewer dollars going to your heirs and a potential shortfall should you require expensive long-term care during your later years. Without question, it’s a difficult decision to make.


A far worse decision, however, is panicking during the next market crisis – and there will be a next one – and making a potentially costly investment decision driven purely by the emotion of the moment. Hence why, with the market recovery, there’s a chance for a reset should you desire one.


During times of extreme market volatility, many clients, especially retirees, find comfort knowing they have X years of cash flow in fixed income investments. Knowing that keeps them from panicking when they open brokerage statements that show significant drops in portfolio value. They also know that time is on their side; markets eventually recover and being able to wait out a market downturn by staying invested is in their best interest.


Then again, there’s logic, and there’s emotion, and the subconscious can be immensely powerful. Our ability to make rational decisions is sometimes overwhelmed by fear, fear that can’t be overcome by historical charts, graphs, or verbal reassurances. If you’ve ever felt that level of fear during a market crisis, you know how difficult it is to suppress.   


There’s an old expression in the financial planner biz: You can either sleep well, or you can eat well, but you can’t do both. In practical terms, it may cost you a few sleepless nights along the way but investing for the long haul should result in eating well (e.g., having enough money) throughout your retirement years. The alternative is sleeping well now, but then possibly having a cash shortfall should you live too long or have unexpected expenses along the way.


The dilemma is real; worrying about the best solution for you is what keeps us up at night.




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 the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by S.F. Ehrlich Associates, Inc. (“SFEA”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFEA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  SFEA is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of SFEA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a SFEA client, please remember to contact SFEA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing, evaluating, or revising our previous recommendations and/or services.