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Crashing Stock Markets and Retirement Savings

Here we go again (March 2020 – COVID-19 and the markets). The stock market has taken a dive. When writing this, the Toronto stock market is at approximately 12,000 points, down about 33% from recent highs. Any portfolio exposed to the stock market (i.e. holding “equities”) will have declined. This will include individual stocks, equity and balanced mutual funds and equity-based exchange traded funds. In addition to the stress of Covid-19, some inexperienced investors are panicking about losing their retirement savings. If this is you, stop and think before reacting.

Regardless of the best planning, these times are unsettling, but if you sell now, you may never recover your money. Remember your original retirement plan (hopefully you have one). If you are in the stock market, you knew (or should have known) this would happen. If you worked with a professional financial advisor who sold you your investments, they are now there to guide you. The cost of their advice is often built into the fees taken from your investment portfolio, so take advantage of their services, knowledge and experience. Write down your questions and concerns, then call them for direction on whether or not you need to make adjustments. They will likely remind you of their past discussions with you about market ups and downs. They will explain that the market has always regained its losses after a decline, as it did after the 50% reduction in 2008/2009, although nothing is certain. However, it is important that they speak about your own plan, and advise whether adjustments are needed at this time. Make sure your questions are answered. If you are retired and drawing from your equities to pay expenses, one adjustment will likely be important.

First, “financial planning 101” says that you should have cashable deposits equal to three to six months of living expenses to help you in emergencies. It also teaches that you should not invest any money in the stock market if you need it for living expenses within the next five years, preferably seven to ten years in my opinion. This is because you always need “safe” money to spend when a stock market decline occurs. This money would be in savings accounts, bonds, money market and bond mutual funds, as well as guaranteed investments that mature on a regular basis. These are called “fixed income” investments.

Some advisors recommend systematic withdrawal plans, with money being taken out of your equity and balanced fund portfolios for living expenses on a monthly basis. If this is you, now is the time to speak to your advisor to make a switch to drawing from your fixed income portfolio. To prevent permanent losses, you may need to stop taking money from your securities that have declined in value.

For example, last month you may have been selling 10 units at $100 each to get $1,000 for your cash needs. If those units are now worth $70, you must now sell 15 units to meet your needs – 50% more units than last month. First, common sense says that you do not want to be selling more units when the price is low. Remember the rule of buying low and selling high. Second, you are using up your retirement savings 50% faster at this market level. If this major decline lasts for months or years, significant damage can be done to your retirement nest egg.

If your plan did not have an emergency fund and a portfolio of fixed income securities to last you at least five years without touching your equities, you should ask yourself or your financial planner one question, “Why not?” If you have no way of paying for your lifestyle without taking money from your stock market portfolio at times like these, are you losing money you cannot afford to lose? If so, you need to get a second opinion from another financial advisor.

If you have extra fixed income securities and cash available, now is also the time to talk to your advisor about buying more equities. If equities are “on sale,” you advisor may recommend some opportunities for you. Remember the theory of buying low and selling high.

Of greatest concern is protecting your financial future. Understand the opportunities and the risks. Choose wisely and with full understanding of what you are doing. You worked hard to save this money, and it is important to you. It is your money, and, ultimately, you (not your advisor) are responsible for choosing how you invest it.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum