Investor’s Safety Drill: Preparing For Turbulence?

airplane-flight-attendantLately, the stock market seems to go nowhere but up.

It’s easy to forget that what goes up can also come down.

By all means, enjoy the smooth ride while it lasts, but do prepare yourself for the inevitable turbulence ahead.

It’s no different, says investment management executive Steve Atkinson, from getting on an airplane and watching the flight attendant deliver the safety instructions. Buckle your seatbelt. Locate the exits. Put on the oxygen mask.

It doesn’t mean you are going to crash.  But it is certainly a good precaution to walk through the steps you would need to take in an emergency, so when and if the real thing comes, you will keep your cool and not panic.

In a recent column for Financial Planning magazine, Atkinson delivered these evergreen words of wisdom to investors:

“Bottom line,” he said, “expect down periods.”

Just like the flight attendant who delivers preflight safety instructions to the passengers, here’s the script Atkinson feels all investors should hear before takeoff:

Your retirement may last 30 years or longer.  Take the example of a 62-year old couple just going into retirement, who according to Atkinson has an average joint life expectancy of 30 years. That means their retirement period may last 30 years, until roughly age 92 (although for many people, it could last even longer).

That’s a long journey requiring commitment to a long-term strategy.  Stock and bond markets go up and down in the short-term, says Atkinson, but have trended up in the long-term. Just like the transcontinental airline passenger, if you are flying from New York to Los Angeles, don’t stop the plane and get off in Kansas City just because there are a few clouds in the sky. Your goal is to get to the west coast.  Don’t lose sight of that.

It’s absolutely normal to encounter some turbulence.  Atkinson’s firm looked at the history of the S&P 500 stock index since 1926, and divided that 86-year stretch into 58 rolling thirty-year periods, which is – not coincidentally – the same length of time that our hypothetical 62-year old couple will spend in retirement.

During the average 30-year investment period, Atkinson found, annualized stock market returns ranged from about 8% to 13%, which is pretty impressive.

That said, the skies were not always sunny and clear.  Over the typical 30-year period, there were 6.5 investment declines of greater than 10%, or about one downturn every 5 years.

Investors should realize that these periodic declines are inevitable. They are not exceptions to the rule; in fact, they are the rule.

The secret is learning how to handle the bumps you’ll encounter along the way.  Just like on the airplane, if you encounter investment turbulence, stay in your seat, fasten your seat belt, and wait it out.  Have confidence in the team guiding you to your destination. You will arrive just as fast, and with a lot less anxiety, if you remind yourself that what you are experiencing is just a normal part of the journey.

And if all else fails, remember there’s no substitute for a good book!

 

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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