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If you're one of the millions of people who've watched the stock market nosedive from its record February 2020 high, you may now be wondering if your current financial strategies will move you closer to your goals, or instead move you further away from them. The good news is that there are ways that you can revise your plan and still work toward attaining a worry-free retirement.
While there are plenty of financial "advisors" who will tell you to "hold on" to your assets because "the stock market always comes back up," this can actually be extremely dangerous advice — particularly if you are planning to retire soon.
One reason for this is because any time the value of an investment goes down, the return must come back even further in order to just get back to even. For instance, if you invested $10,000 and the value dropped by 50% in the first year, at the end of Year 1, you would have $5,000.
$10,000 X (-50%) = $5,000
If the investment returns a positive 50% the following year, though, the value would not go back to its original $10,000. Rather, it would be worth only $7,500.
$5,000 X 1.50 (i.e., positive return of 50%) = $7,500
So, in order to make up for your 50% loss, it would require the investment to return 100% just to get you back to square one — and that's if you didn't sustain any additional losses over that time.
$5,000 X 100% = $10,000
In addition, there is no guarantee that the market will ever come back up to where it was before you sustained a loss. A good example can be garnered from the Nikkei 225, a Japanese stock market index, which is considered similar to the S&P 500 index in the United States.
In late 1989, the Nikkei hit an all-time high of nearly 39,000. Unfortunately, it sustained a substantial drop in 1990, and has not fared quite so well since then. In fact, if an investor had a portfolio worth $1,000 back on December 31, 1989, at year-end 2009 — 20 years later — it would be worth just over $271. Even now, in mid-2020, the Nikkei 225 index is still barely above 20,000.
What if you had planned to retire in 1990, or even 20 years later in 2009?
| Year | End of Year Close | Annual Return | Value of $1,000 |
|---|---|---|---|
| Year1989 | End of Year Close38,915.90 | Annual ReturnN/A | Value of $1,000$1,000.00 |
| Year1990 | End of Year Close23,848.70 | Annual Return-38.72 | Value of $1,000$612.83 |
| Year1991 | End of Year Close22,983.80 | Annual Return-3.63 | Value of $1,000$590.60 |
| Year1992 | End of Year Close16,925.00 | Annual Return-26.36 | Value of $1,000$434.91 |
| Year1993 | End of Year Close17,417.20 | Annual Return2.91 | Value of $1,000$447.56 |
| Year1994 | End of Year Close19,723.10 | Annual Return13.24 | Value of $1,000$506.81 |
| Year1995 | End of Year Close19,868.20 | Annual Return0.74 | Value of $1,000$510.54 |
| Year1996 | End of Year Close19,361.30 | Annual Return-2.55 | Value of $1,000$497.52 |
| Year1997 | End of Year Close15,258.70 | Annual Return-21.19 | Value of $1,000$392.09 |
| Year1998 | End of Year Close13,842.17 | Annual Return-9.28 | Value of $1,000$355.69 |
| Year1999 | End of Year Close18,934.34 | Annual Return36.79 | Value of $1,000$486.55 |
| Year2000 | End of Year Close13,785.69 | Annual Return-27.19 | Value of $1,000$354.24 |
| Year2001 | End of Year Close10,542.60 | Annual Return-23.53 | Value of $1,000$270.91 |
| Year2002 | End of Year Close8,578.95 | Annual Return-18.63 | Value of $1,000$220.45 |
| Year2003 | End of Year Close10,676.60 | Annual Return24.45 | Value of $1,000$274.35 |
| Year2004 | End of Year Close11,488.76 | Annual Return7.61 | Value of $1,000$295.22 |
| Year2005 | End of Year Close16,111.43 | Annual Return40.24 | Value of $1,000$414.01 |
| Year2006 | End of Year Close17,225.83 | Annual Return6.92 | Value of $1,000$442.64 |
| Year2007 | End of Year Close15,307.78 | Annual Return-11.13 | Value of $1,000$393.36 |
| Year2008 | End of Year Close8,859.56 | Annual Return-42.12 | Value of $1,000$227.66 |
| Year2009 | End of Year Close10,546.44 | Annual Return19.04 | Value of $1,000$271.01 |
Just like many businesses, individuals and families should work closely with a balance sheet when it comes to income and expenses. That's because a balance sheet can provide you with a clear image of your current financial condition.
It can also aid you in planning ahead for retirement, as well as various other financial goals that you may have, such as:
A family balance sheet does not have to be complicated. In fact, in many cases, it can be summed up in just one single document that organizes and provides an "inventory" of your assts and your liabilities.
| Assets | Liabilities |
|---|---|
| AssetsSavings account balance(s) | LiabilitiesCredit card balance(s) |
| AssetsChecking account balance(s) | LiabilitiesStudent loan balance(s) |
| AssetsRetirement account balance(s) | LiabilitiesPersonal loan balance(s) |
| AssetsPersonal investment account balance(s) | LiabilitiesHome mortgage balance |
| AssetsHome value | LiabilitiesInvestment property mortgage balance(s) |
| AssetsInvestment/ Rental property value | LiabilitiesAuto loan balance(s) |
| AssetsAutomobile(s) value | Liabilities |
In addition, a family balance sheet can help you to take a look at the "whole picture" when you're determining the overall value of your assets. For example, even though your home may currently be valued at $500,000, you could also have a mortgage balance of $350,000. So, this brings the actual "value" of the home to $150,000
Assessing your liquidity is also an essential component of your current and future financial plan. Liquidity refers to the ease with which an asset can be converted into ready cash, without impacting its market price.
For instance, cash and cash equivalents, such as savings accounts, checking accounts, and money markets, are considered to be highly liquid because they can provide you with instant cash whenever you need it.
Your home, on the other hand, as well as other non-tangible assets like collectibles, are considered to be illiquid, because they are not typically converted to cash very easily (or very quickly). These types of assets will also oftentimes require you to find a willing buyer — and even then, the purchaser may not offer you the amount that you would like to receive.
The economic challenges caused by the COVID-19 pandemic have provided motivation for both individuals and families to revise their personal balance sheets. While it is essential that you are continuously aware of where you stand financially, it is particularly important that during these times of market volatility and economic downturn that people assess where they are financially so that they can determine what strategies to pursue, as well as whether or not to reposition assets.
In addition to market and economic changes, events in your personal life could also be cause for revisions to your financial plan. These could include marriage or divorce, the birth or adoption of a child or a grandchild or the purchase or sale of a business.
With that in mind, it is recommended that you work with an experienced advisor who can guide you through these changes in your financial life, and help you to ensure that your plan is in line with your personal objectives as well as the changing market.
Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
