retirement

Financial Planning for Another 'Lost Decade'

Investors have gotten used to hot returns over the years. What happens if stocks are flat (or worse) for years to come? That's a scary thought for those near retirement, but luckily there are some things you have control over. Here are some steps to consider taking now.

The U.S. stock market was on a roll over the past decade. The S&P 500 was up every single year since 2009 other than one (i.e. 2018) and has produced annualized returns of approximately 13% from the beginning of 2009 through the end of 2019. It has been a wonderful ride for anyone who has been a long-term buy and hold investor in U.S. equities over the past decade. However, the question on the mind of every realistic investor is, “What if the next decade produces much lower returns?” This possibility should disturb investors far more than a recession or bear market.

For context, according to the National Bureau of Economic Research, from 1854 through 2009 there have been 33 business cycles, with the average recession lasting approximately 18 months. A bear market, which is defined by at least a 20% decline from market highs, has occurred on 32 occasions since 1900. They tend to occur about once every 3.5 years and last an average of 367 days.

The lost decade of 2000-2009

While both recessions and bear markets are unpleasant situations for investors, they are over relatively quickly. The thought of experiencing a “lost decade,” with no return on your investment, is far more concerning. For example, the U.S. had a lost decade from the year 2000 through 2009. If one had invested a lump sum of $1 million in the S&P 500 at the beginning the decade, it would have resulted in a final balance of just over $900,000 by the end of it. This is a nightmare scenario, especially for folks who are approaching retirement.

While no one can accurately predict exactly what the future holds, it’s reasonable to assume that the U.S. market will have lower returns over the next 10 years than the unbelievable returns experienced over the past 10 years. This possibility is beyond anyone’s control. The best way for soon-to-be retirees to prepare for this potential scenario is to focus on the strategies over which they do have control.

Strategies for a low-return environment

1. Cash flow management

Taking more control of your cash flow is a great way to compensate for a low-return environment. It will allow you to continue to grow your nest egg even if the market isn’t being helpful. Investors should first focus on minimizing unnecessary expenses. Those extra dollars should be used to increase your savings rate, including maxing out all tax-deferred accounts, including 401(k), 403(b), IRAs and the like. Furthermore, if one’s employer offers a match, it’s important to ensure you are fully participating. The match offers an immediate return on your savings even if the market is not cooperating.

Next, any monies that you don’t need for expenses and are not being contributed to retirement accounts should be set up to automatically be deposited into your taxable investment accounts. Setting up an automatic process will allow investors to seamlessly save money without any emotions hindering the process. A healthy savings rate is one of the surest ways to make up for what you are not getting by way of investment performance.

2. Work longer

Sometimes the best solutions to difficult problems are the simplest. While the thought of working longer may be unthinkable to many, it’s one of the best ways to ride out a tough market. Spending a extra few years in the workforce has the dual benefit of allowing the investor to continue adding to their savings, while also allowing them to delay withdrawing from their savings during a bad market. The few extra years of employment can be a crucial planning technique to ensure that one does not outlive their money.

3. Stay globally diversified

After an incredibly strong decade for U.S. stocks, it may be unthinkable to invest capital anywhere else in the world. However, keeping things concentrated in one area of the global market would be a mistake. Large bets on certain areas of the market may help you make a lot of money in the good times, but that strategy can be devastating if things remain stagnant or, even worse, if they plummet in value.

Looking back to the lost decade of 2000-2009, it’s important to point out that global stocks outside the U.S. annualized a modest positive return over that decade. Furthermore, certain pockets of the market had excellent returns. One example is emerging markets, which annualized just under 10% over that time period.

It’s also worth looking at different asset classes. The S&P 500 is one of the most quoted benchmarks in the world, but it tracks only the 500 largest companies in the U.S. Other asset classes performed quite well. In particular, publicly traded REITs annualized over 10% during that tough market. Additionally, even investment grade fixed income had a better return than the S&P 500 over that time frame. The key takeaway is that even during flat markets there are still areas that may perform well. Staying broadly and globally diversified will almost definitely be beneficial during such periods.

4. Transfer risk to an insurance company

Fortunately, investors don’t need to carry the burden of all the market risk themselves. It is possible to offload some of this risk to an insurance company through the use of annuities. Granted, annuities can be relatively expensive, complicated and are not a good fit for 100% of a client’s assets. However, for certain clients, the right annuity may be an excellent option for a portion of their portfolio. Annuities can guarantee the investor a particular rate of return or a stream of income regardless of how the market performs.

Annuities come in all shapes and sizes, so it’s important to diligently review each offering with your financial adviser before making any decisions. Since an annuity’s guarantees are the responsibility of the insurance company, it’s worth exploring that company’s credit rating to ensure that they can fulfill their end of the contract.

Don’t despair: You do have some control

The thought of being at the mercy of the market may feel like a helpless situation, but it doesn’t have to be. While the past decade has buoyed investors’ portfolios to new highs, it has also helped mask the financial planning and investment errors made by many. In the years to come, if the market’s performance is more muted, it will be even more important for investors to take a disciplined approach to how they manage their financial affairs. This includes focusing on cash flow management and how to prudently invest one’s capital.

The good news is that all the aforementioned strategies are within your control, unlike the returns of the stock market. Putting them into practice will allow investors to achieve their financial objectives even if the market does not cooperate.

Disclaimer: This article authored by Jonathan Shenkman a financial adviser at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice.

About the Author

Jonathan I. Shenkman

Associate Director - Investments, Oppenheimer and Co. Inc.

Jonathan Shenkman is a financial adviser, portfolio manager and the founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc. He is experienced in developing creative strategies that allow his clients to achieve their retirement, estate and philanthropic objectives.

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