Answering these four questions during a bull market can help you improve the success rate of your retirement plan. This will help you be more prepared for the next big correction, whenever that might be. I encourage you to read through each one and then think through and write down your answers. These questions can be valuable, especially if you are getting close to or are already in retirement, but only if you take a minute to answer them yourself.
Question 1: How have you reacted during past downturns?
Think back to March of 2020, or even 2008: did you do anything differently? Did you go more conservative or maybe you went more aggressive? Did you follow your plan the way that it was laid out, or did you not even have a plan that was prepared for those kinds of events?
Recalling how you reacted in the past is a pretty good indicator of how you might act in the future. But also, remember that as you get closer to that retirement date, it’s very common to want to go more conservative. That that feeling gets stronger and stronger the older you get. And 13 years ago in 2008, you might’ve been able to stay the course, knowing that you had quite a way to go until you needed to start using these savings and other accounts for retirement income. Now, much closer to your retirement date, it’s normal to want to feel more conservative, or have a feeling of predictability or certainty. It’s common to want to protect the nest egg, because you’re going to be using it much sooner.
We’ve also seen people make decisions that are not in the best interest of their future. Instead, they make an emotional decision because they don’t have this already built in as part of their plan. So be aware of those feelings as you get closer your retirement date.
Question 2: Does my portfolio take in to account multiple scenarios?
Is your portfolio designed to work during all the potential scenarios that we might go through? Nobody knows exactly what’s going to happen next, but we do know that there are a few economic scenarios to consider. Some are good, some are bad. And since we don’t know, it’s important that your plan and portfolio are prepared for a variety of outcomes.
For example, if we do go through a period of higher-than-expected inflation, is cash really going to be the safest place to be? A lot of people think of cash as a safe haven, but in a high-inflation period of time, is that still true?
Question 3: What if I’m not as smart as I think I am?
It’s very easy for me, and for you, to feel like a genius when everything is going well. Maybe our account values have been going up over the past 10 years or so. It’s normal to feel pretty confident that we know what we’re doing, especially if you get a bit of a kick out of short term decisions with certain investments, and you’ve seen those go up too. But that sort of confidence can sometimes lead to more risky behavior or decisions. And for the retirees that we talk to and help, we’re really not looking for risky decisions. We’re looking for more predictable outcomes versus higher risk. So, I think an important practice here is just staying humble, even when things are going well.
A question within this question could be, am I making good decisions or am I getting lucky? Getting lucky is great, but it’s probably not a repeatable process.
Question 4: Do I have a plan or a portfolio?
There’s a big difference between a plan and a portfolio. A portfolio is a mix of investments. A plan is a map that guides what you should be doing throughout your journey towards retirement. Both the plan and portfolio look really good during bull markets. And it’s not really until a correction where we start to see that the plan becomes more and more valuable.
Please note that this advice is not specifically for you since I don’t know your specific situation. Please talk to a professional who is not only an investment advisor, but also someone who specializes in helping people with retirement income and tax planning.
These four questions originated from CFA Ben Carlson.