Linda has 100 percent of her retirement money invested in equities. She has a home and about $60,000 in cash, which is about enough for one year of living expenses.
“My plan has been to try to grow half of the IRA that I received in the divorce, which was much too low to begin with, as aggressively as I could in exchange-traded funds (ETF)," she wrote. “At that time I was going to move into dividend stocks and use the dividends as income. But now my loss, on paper, has wiped out much of my growth. It’s very scary. I knew my plan was very risky. I am starting to regret it. I am a bit panicky and wondering what to do now.”
Here’s what Linda wanted to know about her retirement account, which was as high as $714,000. Last week, the value had dropped to about $626,000.
— “I feel that now is not the time to start selling these high-growth ETFs to buy dividend stocks. Am I right?”
— “Should I wait until the market goes up again? Or switch before things get even worse, when I know I will need to start using portions of dividends at least for income to live on?”
I asked two certified financial planners (CFP) what they might advise Linda to do. Their guidance may help if you are in a similar situation.
Lynn Ballou, a CFP in California: I’m sure her approach has been consistent with other women in similar situations who have felt the same need for aggressively weighted growth portfolios due to sparse resources. Without knowing everything, a few thoughts do come to mind that might be worth consideration.
If the quality of her individual holdings is very high caliber, then continuing to hold on during the current volatility makes sense. For example, if I looked at Zillow every day about my house’s value, I might be tempted to sell and then buy, and sell and then buy, but for what purpose? It’s still a perfectly fine house, and we bought it for reasons that haven’t changed. That said, I do maintain my house to keep it valuable and useful to me. So drawing that same analogy, I’d use this as an opportunity to review specific portfolio holdings to determine if any are at risk due to the current global economic situation. Since the heart of her portfolio investment objective has been based on maintaining a dividend-yielding portfolio, she should review all her holdings to see if any are at risk of being able to maintain their dividends based on how their business profits are being affected by the coronavirus concerns. A short-term impact may not be worth making any moves, but if she believes any will be adversely impacted for a long time, she should consider options. And of course I’m going to recommend she do this with a qualified professional such as a certified financial planner or other pro unless she is very knowledgeable herself.
As to taking money off the table from time to time, as we age and our needs and resources change with our lives, it’s always a good idea to revisit our asset allocation and be brave to lock in gains when appropriate. Better to do so in a strong market and pay a little tax along the way (unless the funds are in retirement accounts) than being forced to sell when assets have fallen in value. With her cash reserves, she has the strength in her net worth to be patient and develop the right plan.
David Holland, a Florida-based CFP: Can she work? Can she wait longer before she needs to draw on her IRA after the support payment ends?
She is playing with fire. She cannot and should not “roll the dice” on trying to grow her IRA with 100 percent in equities given the proximity she has to needing those funds. She should probably reduce her risk, but I can’t say how much without more information.
The emergency fund balance is commendable; however, it is not a substitute for the proper risk-taking on the IRA. The fact that she is feeling the way she is should tell her that she is gambling. Her “gut” is telling her to rethink her strategy, and she is trying to ignore it.
As a reminder, market downturns can be long and sustained. Remember 2000, 2001 and 2002? That was a three-year downturn. She needs to invest now, as if those three down years are repeated in 2021, 2022 and 2023. To do otherwise is betting her financial life.
Ballou and Holland provide, I think, some good points. I love the home-buying analogy from Ballou and the caution from Holland to balance your desire for growth with prudence.
It has been a wild few weeks on Wall Street, and there is no near-term indication that things will settle down. I’ll continue to field your questions and ask the folks who do financial planning for a living how to handle a stock market that is taking investors on a roller-coaster ride.
Reader Question of the Week
If you have a retirement question, send it to firstname.lastname@example.org. In the subject line, put “Question of the Week.”
Please join me on Thursday, March 12, at noon (Eastern time) for a live discussion about your money.
Retirement Rants and Raves
Your thoughts: I would like to continue discussing how you’re handling the stock market turbulence. How is your own retirement account doing? What moves, if any, have you made? Send your comments to email@example.com. Please include your name, city and state. Put “Stock Market” in the subject line.
Last week, I asked: How are you dealing with the market plunge? Have you made any changes to the way you are investing for retirement?
Chuck Yanus of Crossville, Tenn., wrote: “No problem weathering the downturn so far. As long as one has a portfolio they are comfortable with, are secure in the knowledge that history proves the markets will come back (eventually), and have a cash cushion to fall back onto, there is no reason to panic over the coronavirus or any other ‘sky-is-falling’ scenario. In fact, I have been taking advantage of the downturn to pick up a few individual equities, sell covered call options where they are to my short-term advantage, and add to my ETF holdings. This too shall pass, people.”
“I began investing in the Thrift Savings Plan in 1986,” wrote Jonathan Lash of Falls Church, Va. “My portfolio has been in the 60 percent stock/40 percent bond-money market allocation for about 15 years. We are always advised to not try to time the market, so I’m not overly aggressive about ‘buying on the dips.’ When I saw the drops last week, I moved 7 percent of funds from G to the C fund, thinking that stocks were on sale. Of course, it could go back down, but that’s okay since I have five years to retirement, which is enough time for the market to recover. And I’ll continue to purchase stocks using dollar-cost averaging every two weeks through payroll deduction.”
Herbert Taylor of Freeport, Maine, wrote: “I’m 70, divorced, in generally good health, own my own home and am debt-free. Between a pension, Social Security and a frugal, pay-as-I-go lifestyle, I rarely dip into retirement savings. I have enough cash at hand to handle most unforeseen emergencies without selling equities at a loss. So, I’m not terribly alarmed by the ongoing plunge. It was way overdue, if you take a historical perspective, and I have every confidence that stocks will recover, eventually. One silver lining to the present situation is that it may prompt many folks to take a realistic look at their tolerance for risk. It’s easy to assume a high-risk toleration when everything is rosy, but when the market goes south, people can get a better picture of how they really feel. They can also assess how much emergency cash they need at the ready, should the downturn continue for a year or two or three.”