Retirement Investing during Yo-Yo Market Corrections

The little boy grabbed his yo-yo and jumped out of the car as soon as it pulled to a stop in front of his grandmother’s house. He ran across the grass toward the front walkway with its many steps to the porch. Up the steps he climbed, his yo-yo moving rhythmically down and up as he smelled the familiar aroma of fresh-baked cookies coming from the house above. The yo-yo whirred down and up, down and up as he took each step. Finally, with yo-yo still moving, he reached the top and headed for Grandma and her fresh batch of cookies.

Where Is Your Focus?

In that illustration, did you find yourself focused on the yo-yo or the little boy climbing? Hopefully you identified with the boy. The yo-yo wasn’t going anywhere, but the boy had a clear path and purpose: Grandma’s cookies. And he kept climbing.

In a similar way, when the markets gyrate wildly as they are doing now, it is easy to become fixated on the ups and downs of the yo-yo and take your eyes off the little boy climbing up the stairs. Enduring wild daily market changes is often just part of being an investor. It comes with the territory. But these yo-yo markets can add stress for retirees who see the sudden dips threatening their nest eggs. But remember, regardless of what the yo-yo does, the little boy is going to get to the top of the stairs and reach his goal. We just don’t know for certain how long it will take.

Three Steps to Peace of Mind

So how do you keep from focusing on the daily swings that can steal your peace of mind? Here are three steps to help take your focus away from the yo-yo:

Fix your perspective. The stock market, over time, returns an average of 10 percent or more per year. But this gain is not a straight-line shot. In the 92-year history of the S&P 500 Index, we have had 49 episodes of correction where stocks have fallen more than 8 but less than 20 percent. That’s nearly one correction every other year. These corrections last anywhere from one week to about six to eight weeks. So don’t be surprised and don’t panic when they occur.
Create a written plan. You wouldn’t take off on a long road trip without consulting a map or GPS, would you? So why do so many of us think we can retire in peace without a written plan? A written plan should prioritize your most important goals, include all your available assets, and outline an income strategy that shows how you are going to consistently fund your goals with your available resources. Be sure to review and update this plan at least annually.
Protect your essential income. Think of your retirement income as filling two separate expense buckets: your essential expenses that occur every month and those non-essential expenses that are more discretionary. The key is never to be in a position of relying on the stock market to meet essential expenses. Your goal should be to cover these expenses with guaranteed or stable income like Social Security, not with income that can change with the market yo-yo.

Climbing the Retirement Stairs

History shows us that the stock market is a great place to get high returns but a lousy place to get safety. So if you need that money in the next year or two, leave it out of the market. The lure of that great return smells a lot like Grandma’s cookies. But the cost of gaining that return usually involves enduring a little pain along the way.

Climbing the retirement stairs is partly about getting to your goals and partly about making the climb with the least amount of stress. So, when you feel yourself following the yo-yo and not the little boy, practice these three steps: fix your perspective, create a plan, and protect your essential income.

Then go have fun chasing those cookies.

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About the author – Andy Raub is known as “America’s Encore Coach” because of his passion to help retirees repurpose their lives and reorganize their money. Andy is the author of the new book The Encore Curve – How to Retire with a Life Plan That Excites You and the founder of the Encore Curve Program. See how The Encore Curve process can help you clarify your life and simplify your money at EncoreCurve.com