We recently stress-tested our client’s financial plans to determine how they would withstand a 50% stock market correction and a perpetual inflation rate of 5.25%. Thankfully, most plans withstood the test. Since 1971, there have been several corrections of 40% or more – 1974, 2002, and 2008; the S&P 500 fell 32% during the COVID correction. Inflation has averaged 3.24% since 1914, so we are confident that our plans can perform well in various market conditions.
What about the plans that failed our test? After screening all our plans, we focused on those that did not pass, and, after tweaking a few inputs like asset allocations, spending limits, or retirement dates, they improved noticeably.
We are in tumultuous times and face astronomical headwinds from inflation, rising interest rates, and war. Markets react fiercely to news headlines, and volatility is the new normal, and it’s challenging to hold stocks when they gyrate wildly. Despite all the recessions, corrections, drops, and pullbacks, the S&P 500 has risen 4,750% since 1971. The market rewards the patient buy-and-hold investor.
How would your life change if your investments fell 50 percent? Could you still provide for your family? Will your basic needs be met? If so, stay the course. If not, consider reducing your equity exposure by adding bonds and cash.
Who knows what will happen tomorrow – no one knows. I’m not aware of any analyst or expert who accurately predicted COVID or the Ukraine War – two significant events impacting everyone. We can die a thousand deaths worrying about every possible outcome, but it’s not worth it. Instead, follow your financial plan, diversify your assets, and think long-term.
The road to success is dotted with many tempting parking spaces. ~ Will Rogers
March 23, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.