The market has been a wild ride lately, and like all wild rides, it's creating its share of frayed nerves. From early February to mid-March, the Volatility Index (VIX)—also known as the "Fear Index"—was up over 500 percent. Then it declined more than half. Even now, it's bouncing all over the place. What this means is fear is behind a lot of people's financial decisions. That's never a good place to be, says investors' rights advocate Peter J. Mougey.
"Fear-driven decisions are rarely good decisions, and they rarely have favorable outcomes," says Mougey. "The best strategy in a time of elevated fear is to calm down, avoid knee-jerk reactions, and get educated on how the market works. And that means making sure you have a healthy relationship with a financial advisor who has your best interests at heart."
Mougey is a national securities and investment fraud attorney with Pensacola, Florida's Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. He is an advocate for small business owners and "Main Street investors" who've worked hard all their lives and saved religiously, only to lose everything due to bad advice.
What he's learned and seen over the years has not only given him a passion for defending these people in the legal system but also a solid grasp of measured, commonsense investing practices.
Mougey offers the following tips for anyone who's worried about what to do next (or not to do, as the case may be) in the volatile coronavirus market:
First, make sure both you and your financial advisor are fully engaged. You've almost certainly heard from your advisor by now. But is it just a mass email meant to calm you down, or are they truly leaning in? Do you get regular status updates? (Full-service brokerage firms should be contacting you every week or two, especially if you are heavy in stocks or using leverage.) Do you have a solid understanding of what they're recommending and why? Do you understand the math behind their advice? Mougey suggests asking questions like the following:
First, make sure both you and your financial advisor are fully engaged. You've almost certainly heard from your advisor by now. But is it just a mass email meant to calm you down, or are they truly leaning in? Do you get regular status updates? (Full-service brokerage firms should be contacting you every week or two, especially if you are heavy in stocks or using leverage.) Do you have a solid understanding of what they're recommending and why? Do you understand the math behind their advice? Mougey suggests asking questions like the following:
- What percentage of my portfolio is in stocks?
- What percentage is in bonds?
- If I were in 50 percent stocks and 50 percent bonds, how much would my portfolio be down right now?
- How does my performance stack up against broad market indices like the S&P 500 or Barclays U.S. Aggregate Bond Index?
"The performance of your portfolio should follow the performance of the broad market indices," says Mougey. "They are good benchmarks. The further you deviate from the broad market indices, the more often you need to talk to your advisor. That's true whether you're 20 or 70."
In general, start your analysis using the "age rule" (and if you are not, definitely understand why). Essentially, this means 100 minus your age should be in stocks. If you're 20, around 80 percent of your portfolio should be in stocks. If you're 80, around 20 percent should be in stocks. This simple formula is a good starting place for your conversation. For most of us, it's not too late to get our portfolio balanced, asserts Mougey.
"It's actually pretty simple: Stocks have higher volatility," he says. "They bounce up and down. The older you get, the less volatility you can handle because you don't have time to recover the losses. People at or near retirement should have limited exposure to stocks.
"It's actually pretty simple: Stocks have higher volatility," he says. "They bounce up and down. The older you get, the less volatility you can handle because you don't have time to recover the losses. People at or near retirement should have limited exposure to stocks.
"If your advisor is suggesting you deviate from the age rule, make sure they can explain why," adds Mougey. "They need to have a sound strategy, and you need to understand it."
If you're young (in your 20s and 30s), sit tight. "Pay attention to what's happening around you," says Mougey. "The coronavirus market should be a lesson to you to invest as much as you can now so that when/if an earthshaking event happens when you're older, you've built up enough of a nest egg to be able to handle the volatility.
If you're young (in your 20s and 30s), sit tight. "Pay attention to what's happening around you," says Mougey. "The coronavirus market should be a lesson to you to invest as much as you can now so that when/if an earthshaking event happens when you're older, you've built up enough of a nest egg to be able to handle the volatility.
"The years 2000 to 2010 are another example of why you shouldn't wait 'til the last minute," he adds. "Over this entire decade, the stock market was flat. A person who waited until they were in their 50s to invest during this time period received no benefit. Invest early. Time is your friend."
If you're middle aged (in your 40s and 50s), don't panic. Yes, it's extremely difficult to watch the rapid declines. You have time to recover, so don't get out of the market now. The Dow has declined 30 percent faster than at any other point in history. There has been a large bounce, but no one knows when we will recover. The problem with getting out and watching from the sidelines is you will invariably miss the bounce.
If you're middle aged (in your 40s and 50s), don't panic. Yes, it's extremely difficult to watch the rapid declines. You have time to recover, so don't get out of the market now. The Dow has declined 30 percent faster than at any other point in history. There has been a large bounce, but no one knows when we will recover. The problem with getting out and watching from the sidelines is you will invariably miss the bounce.
"But always ensure you are properly allocated to stocks and bonds, given your goals, before you just sit and watch the activity," he adds.
If you're retired and taking withdrawals, ask yourself: Can I afford to ride this out at my current rate? Keep in mind that we might be in the middle of the downspin. Back in 2000, a lot of investors believed we were at the bottom when the S&P had declined 10 percent. Then in 2001, it declined another 10 percent. Everyone thought, After two years of declines, there is no way we can have a third year, so we must be at the bottom. Then in 2002, it declined 20 percent.
The point, says Mougey, is that you never know where you are in the cycle. This is why you need to make sure you aren't taking too much in withdrawals. A sustainable withdrawal rate is 4-5 percent. If you're taking more than that, there's a risk of entering the "death spiral," and you might not recover. And the sustainable rate also holds true in good years.
"You can't take large withdrawals in good years, because there will always be declines," he notes. "You need market build-ups to offset the flat periods. Large withdrawals coupled with large declines makes it impossible to rebound. This is the 'death spiral.' Sustainable withdrawals with reduced volatility from a balanced portfolio means you can rebound when the market swings up again. The goal is to reduce large fluctuations over time." NOTE: See tip sheet below to understand how the math breaks down.
If you decide you can't afford to ride it out, consider getting out of the market. For example, if you had $150,000 before the coronavirus market and most of your portfolio is in stocks or concentrated in poor-performing sectors, you're probably now down 20-25 percent. So if you're down below $100,000 because of withdrawals and losses and simply cannot afford to lose any more, you may want to get out of the market now.
If you do decide to get out, you have two choices: go into bonds or go to cash. You can go into bonds and be pretty safe, but there's no absolute certainty. For example, in 2008, people still lost money in bonds. Also, if interest rates rise, bonds decline. The other option is to go to cash—perhaps in the form of a CD or just sitting in a savings account. Just don't think of this as a long-term option, says Mougey—inflation will eat away at the value of your money.
If you do decide to get out, you have two choices: go into bonds or go to cash. You can go into bonds and be pretty safe, but there's no absolute certainty. For example, in 2008, people still lost money in bonds. Also, if interest rates rise, bonds decline. The other option is to go to cash—perhaps in the form of a CD or just sitting in a savings account. Just don't think of this as a long-term option, says Mougey—inflation will eat away at the value of your money.
Finally, don't think you can predict tomorrow's hot stocks. We're seeing Clorox and Peloton and Netflix doing well. Their stocks are going crazy. But are you buying at the peak? Market timing doesn't really work well for most people.
"There are always hot stocks, but the sectors just change," says Mougey. "Bottom line, over the long-term, stock picking doesn't work."
One more thing: Make sure the conversations you're having with your financial advisor are calm and rational, says Mougey.
"They should be able to explain why their advice is research-backed and based on the performance of broad market indices," he adds. "They shouldn't just offer reassurance like 'stay the course.' The conversation has to be data-driven. If not, that's a red flag."
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Doing the (Stock Market) Math: Three Rules for Retired Investors
If you're making withdrawals from your retirement account, you need to understand
the math behind your financial advisor's strategy. Peter Mougey says you should
make sure they are following three critical rules.
If you're making withdrawals from your retirement account, you need to understand
the math behind your financial advisor's strategy. Peter Mougey says you should
make sure they are following three critical rules.
Retirees who make regular withdrawals from their portfolio have specific risks that younger investors don't need to worry about. That's why it's so important to understand the math behind what you're doing—especially in a time of market turmoil like the one we're in now.
"If you're in this category, you'll want to talk to your financial advisor right now," says Peter Mougey, national securities and investment fraud attorney with Pensacola, Florida's Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. "Don't keep blindly moving ahead, hoping to catch the rebound. And don't leave their office until you're sure you understand the math."
Here are three "math rules" retirees should keep in mind as they talk to their advisors:
RETIREE MATH RULE 1: In a declining market, withdrawing too much money can lead to the death spiral. Let's look at a scenario where you're withdrawing way more than 4 percent a year from a portfolio that's $100,000 and heavily weighted to stocks. Right now, due to the coronavirus market, you could be down to $80,000. If you are also taking out $1,000 per month, or 12 percent, since the beginning of the year, it is possible your life savings has declined to $75,000. If the market continues its gyrations while you make $1,000 monthly withdrawals to the year-end, your portfolio could be close to $60,000.
Next year, in order to support this $1,000 per month withdrawal, your portfolio would need to return 20 percent. This is almost impossible over the long-term. To recover to the $100,000 and support the withdrawal, the market would need to bounce approximately $50,000, or almost 80 percent, to return to $100,000. If the market declines, older, retired investors making regular withdrawals may find themselves in what Mougey calls the death spiral.
"The golden rule of investing while taking withdrawals: don't go backward to the point that you enter the death spiral and recovery is impossible," says Mougey. "To avoid this, you and your advisor may need to look out for a couple of red flags."
"The golden rule of investing while taking withdrawals: don't go backward to the point that you enter the death spiral and recovery is impossible," says Mougey. "To avoid this, you and your advisor may need to look out for a couple of red flags."
RETIREE MATH RULE 2: Don't withdraw more than 4 or 5 percent (even in the best of times). First, add up your monthly cash needs throughout the year. If your total cash need is more than 4-5 percent, you are likely withdrawing too much. Many financial advisors tell retired investors they can rely on the average long-term stock market return. Often the range they rely on is 10-12 percent. This is bad advice, says Mougey.
"I have seen the devastation this advice causes more times than I can count," says Mougey. "An advisor may say, 'Why work when your withdrawals are more than you are making now?' The financial advisor recommends a portfolio of almost all stocks and higher-risk bonds to support taking distributions at this level. It is not a matter of if this advice will end up ruining your life savings; it's a matter of when.
"The academic and industry literature suggests portfolios can sustain only 4-5 percent over the long-term," he adds. "The further you get away from 4 or 5 percent, the higher the risk you'll be involved in a death spiral that you can't ever recover from."
RETIREE MATH RULE 3: Stocks are a young person's game (too many stocks = too much volatility). If you're retired and your portfolio is almost all stocks, stock mutual funds, and high-yield bonds (often called junk bonds), you are exposed to too much volatility. Granted, stock returns are much higher than bonds, but the additional return comes with much higher risk. Volatility that comes with stock portfolios, coupled with withdrawals, is a recipe for disaster for retired investors. Quite simply, you don't have 20 years to allow averages to smooth volatile stock returns.
The sequencing of stock returns is what makes this a game of Russian roulette. Yes, stock returns may average 10-12 percent, but they're not like a CD that pays the same amount every year. For example, stocks may have the following returns over four years: Year 1: 15 percent, Year 2: 27 percent, Year 3: 5 percent, Year 4: -10 percent. This is often referred to as the "sequence of returns." If the positive three years come first, the retiree may have a chance. But if during the first year of retirement, the market declines 10 percent and the investor withdraws 10 percent, the chances of recovery are low. The sequence of returns demonstrates why a retired investor can't rely on averages.
Your investment-grade bonds allocation should be about your age, says Mougey. For example, if you are 70, then you should have no more than 20-30 percent in stocks. Fewer stocks and more investment-grade bonds will reduce volatility, minimize the harm sequence of stock returns can cause, and allow you to enjoy retirement without outlasting your money.
Your investment-grade bonds allocation should be about your age, says Mougey. For example, if you are 70, then you should have no more than 20-30 percent in stocks. Fewer stocks and more investment-grade bonds will reduce volatility, minimize the harm sequence of stock returns can cause, and allow you to enjoy retirement without outlasting your money.
Is it time to rebalance your portfolio? Get "skinny" and stop taking withdrawals for a while? Go to cash? It depends on your situation, says Mougey—just make the decision deliberately and with both eyes open.
"Don't just keep doing what you're doing and hope for the best," he says. "These are extraordinary times, and hope is never a strategy. Neither is blind trust in your advisor. Many are great, but some aren't. Make sure you're fully aware of the issues and engaged in making the best decision for your life and your future."
# # #
Peter Mougey is a partner in the Pensacola-based law firm Levin Papantonio and the chair of the firm's securities department. He concentrates his practice in the areas of complex litigation, financial services, securities litigation, and whistleblower or qui tam litigation.
Mr. Mougey advocates for the rights of investors as both the past president and member of the board of directors of the national securities bar, PIABA, which was established in 1990 to promote and protect the interests of the public sector in securities and commodities arbitration. Mougey has spent much of his career leveling the playing field for investors. He has proposed reforms to combat Wall Street fraud, through a new fiduciary standard in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. He has also spearheaded communications with state and federal regulators to ensure that investors' voices are heard.
Mr. Mougey has represented over 1,500 state, municipal, and institutional entities, as well as tribal sovereign nations, in litigation and arbitration around the globe. In addition, he has represented more than 3,000 individual fraud victims in state and federal court and arbitrations. Mr. Mougey has been recognized as a transformational leader in and out of the courtroom and is often called upon to simplify the country's most complex cases.
Mr. Mougey has represented over 1,500 state, municipal, and institutional entities, as well as tribal sovereign nations, in litigation and arbitration around the globe. In addition, he has represented more than 3,000 individual fraud victims in state and federal court and arbitrations. Mr. Mougey has been recognized as a transformational leader in and out of the courtroom and is often called upon to simplify the country's most complex cases.
He has also served as chairman of the NASAA Committee, Executive Committee and FINRA's Improving Arbitration Task Force. Currently, Mr. Mougey serves on the PIABA Foundation charged with educating investors in conjunction with the SEC. In recognition of his long-term and sustained dedication to promote the interests of investors, he received the PIABA Lifetime Distinguished Service Award from his peers.
Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A., has been in existence for more than 65 years. It is one of the most successful plaintiff law firms in America. Its attorneys handle claims throughout the country involving prescription drugs, medical devices, defective products, securities, and consumer protection.
Based on law firm verdicts and settlements exceeding $4 billion, its securities fraud lawyers are committed to seeking justice for the victims of investment fraud and misconduct. Led by attorney Peter Mougey, the past president of the national securities bar PIABA, the securities and business tort department has represented more than 1,500 investment fraud victims across the country in state and federal court and securities industry arbitration.
To learn more, please visit www.levinlaw.com.
Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A., has been in existence for more than 65 years. It is one of the most successful plaintiff law firms in America. Its attorneys handle claims throughout the country involving prescription drugs, medical devices, defective products, securities, and consumer protection.
Based on law firm verdicts and settlements exceeding $4 billion, its securities fraud lawyers are committed to seeking justice for the victims of investment fraud and misconduct. Led by attorney Peter Mougey, the past president of the national securities bar PIABA, the securities and business tort department has represented more than 1,500 investment fraud victims across the country in state and federal court and securities industry arbitration.
To learn more, please visit www.levinlaw.com.
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