- A financial planner tells the cautionary tale of a client who left the market in 2020.
- Retirement portfolios are risk-adjusted and diversified to survive economic downturns.
- Selling at a loss and reinvesting when the market recovers will cost you more down the line.
While recession fears persist and international tariffs weigh heavily on major indexes like the S&P 500 and Dow Jones, investors who resist panicking are best positioned to capitalize on the eventual recovery in their retirement plans.
Jaime Eckels, a financial planner and wealth management partner at Plante Moran Financial Advisors, has advised retirees through three US recessions. Most of her clients listened to her advice to stay invested in the market, but the few that didn't paid the steepest price.
Avoid panic-selling
Eckels told Business Insider of an instance where one of her clients, a retired woman, started losing sleep during the COVID-19 recession in 2020, when the Dow Jones had fallen by 37% over a few weeks. Despite making numerous phone calls "cautioning her against selling her equities," and Eckels reassuring her client that there was "plenty of cushion in the plan for a decline in the market," her fears got the best of her.
Within one day, Eckels' client sold all her stock. A week later, the market rebounded.
"Some people just tend to do the wrong thing at the wrong time," says Eckels, "That's why it's so important to have a strategic asset allocation to follow regardless of what's going on in the market, whether times are good or bad."
Recessions are normal, occurring roughly every 6.5 years and lasting about 10 months on average, despite how scary the market's volatility looks on a day-to-day basis.
Focusing on short-term losses rather than long-term financial goals can lead to panic selling.
"She thought being out of the market would provide peace of mind as she didn't have the risk of any more losses," Eckels says. "But she didn't realize that when the market hit bottom, she was left wondering when and how to get back in."
Stick to the plan
Now is the time to "stay the course," Eckels says, "as the one thing that can really jeopardize your financial independence is timing the market and making the wrong calls at the wrong time."
That's where a risk-adjusted financial plan comes in.
Financial plans are built with an individual's risk tolerance, goals, and time horizon in mind. Since retirees are no longer working to generate income, their portfolios are diversified to protect the longevity of their funds without being subjected to unnecessary market risk.
Retirees should have "enough fixed income bonds in the portfolio to pull from, as those tend to be stable, instead of having to sell out of stocks at an inopportune time in the market," Eckels says.
While her portfolio was experiencing significant losses, Eckels' client's overall financial plan was set up with enough cash flow and fixed-growth to get her through the recession without needing to touch the equities in her portfolio. That way, her stocks would have had enough time to recover.
However, instead of staying invested, Eckels' client allowed her judgment to be clouded by the short-term losses, triggering a premature exit from the market.
"Part of investing is facing that there are going to be bear markets and recessions over the course of the plan," Eckels says and explaining that the best thing to do is to be "able to ride it out, just like you do during really good times in the market."
Before making a rash financial decision, consult an unbiased third party like a financial advisor or planner.
Compare Today's Rates
Don't miss out on the rebound
"Every time we've had a recession in the past, or a bear market, we've always recovered from it," Eckels says. "Sometimes it takes months, sometimes it takes years, but it has always recovered."
Once Eckels' client completely left the market, she lost the opportunity to bounce back alongside it.
"When you see people miss just a handful of the best days in the market in the given year, you see how drastically that can impact their longer-term performance," Eckels says.
Once Eckels' client rejoined, five months later, she found herself buying in at a high point.
"She cashed out at the bottom and didn't get back in until the market had fully recovered," Eckels says. "The difference is a permanent loss that she suffered in her portfolio that has permanently impacted her financial independence, and how much she can spend per year."
