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The Next Crash is Upon Us!

Hardly a day goes by without an article predicting an impending stock market crash. As we reiterated in a recent commentary, now is not the time to chase hot investments. However, we do not profess to have any insights on the timing of the next crash, and we certainly do not advocate selling your stocks or stock funds. Since we are now 10 years removed from the onset of the last financial crisis, we’d rather draw a few lessons from history:

Bear Markets Shouldn’t Matter to Long-Term Investors (> 10 years)
As illustrated by the chart below which looks at 10-year returns for different types of investments, had you invested the day before the global crisis erupted 10 years ago, you would have at least broken even on all categories except European stocks, oil, and commodities (we ignore currencies). Despite a decline of 57% in the price of the S&P 500 index early on, investors with the worst luck would have recuperated their original investment within three years, if they had held on to it (and reinvested dividends). Investors in one of the most toxic investments as the crisis unfolded, European junk bonds, would have doubled their investment and done better than all other categories over the past decade. Because our clients’ portfolios were diversified across a dozen asset classes, and because we rebalanced throughout the crisis, they generally recovered quickly as well—so long as they did not panic.

Investors Nearing Retirement Need to Be Cautious
Those nearing retirement must emphasize a greater level of preservation of capital in their asset allocation since it is likely that their portfolios cannot withstand a crash coming at precisely the time that they switch from contributing to withdrawing assets. They might not be able to make up any shortcoming from a crash from increased savings or working longer. At the same time, the average life expectancy of a new retiree is greater than 20 years, making stocks an important part of the overall allocation in order to protect the portfolio from inflation. Each investor’s situation is different, and the appropriate balance between growth and preservation of capital should reflect one’s goals and attitude to risk. Clearly, we do not advocate selling all your stocks but there is a 3 to 7-year period straddling the onset of retirement during which it is important that the scale doesn’t tip too much on the risky side.

Trying to Time the Market is Useless
While we don’t think we should always bank on stock market recoveries as long and powerful as the one that began in 2009 and continues to this day, we do expect that a diversified portfolio of stocks has the best chance of delivering a long-term positive return in excess of inflation.  For most investors, taking the approach advocated above (ride markets’ cycles with an appropriate asset allocation) will yield better results than trying to time the ups and downs. This is because successful market timing requires getting two decisions right. Not only do you need to exit before the onset of the decline, you also need to reinvest close to the bottom, to do better than the buy-and-hold strategy. We do not know of any investor who has done this consistently throughout bull and bear markets.

We feel strongly that our role as your advisor should be to help you save and invest consistently, plan and allocate your assets in accordance with your goals, and help you navigate tough markets. If we do a good job with those tasks, we strongly believe that it will leave you richer and happier than fruitless attempts to time the market.

Charitable Giving during Retirement

Homeless animals, needy children, and mentally handicapped adults, among others, are all beneficiaries of our clients’ generosity. In addition to the tax breaks available on charitable contributions, numerous studies have corroborated that there’s a psychological benefit of charitable giving. Research also indicates that altruism may be associated with improved physical health, too.

When discussing charitable goals with our clients, these are some of the issues that we consider:

Stress-test the portfolio’s longevity before making financial gifts to charity.
Before deciding how much to give to charity, a key first step is to make sure we are thoroughly comfortable with our clients’ nest egg’s ability to last throughout a potentially very long retirement. We use some tools and our experience of market cycles to evaluate whether your portfolio can support your planned withdrawal rate, including charitable contributions. If there’s a possibility of falling short, we might advise you to defer charitable lifetime gifts and instead weave charitable giving into your estate plan.

Consider a gift of time.
If it turns out that charitable gifts during your lifetime are unaffordable, you can still make a difference by volunteering your time at your favorite charity. Doing so won’t earn you a tax deduction, but getting out and about to help in your community will likely provide even more of the feel-good effects that you experience when giving cash or writing a check.

Smarter Giving to Maximize Tax Benefits.
One of the big perks of making charitable contributions is that you may be able to earn a tax deduction on your gift, assuming your itemized deductions exceed the standard deduction. Certain strategies maximize the tax benefits such as gifts of appreciated stock or so-called Qualified Charitable Distributions from your IRA. Donor-advised funds can provide greater flexibility in managing your tax benefits, by separating the deductible gift from the actual donations to your favorite charities. In consultation with your tax professional, we can help and create a strategy that will maximize the tax benefits of your charitable giving.