Voice of Business Blog

Guest post from Greater Rochester Chamber members Victor Hugo Marin, Vice President, Senior Investment Analyst and Mike Lawhead, Vice President, Portfolio Manager – Tompkins Financial Advisors

If you’re targeting retirement within the next ten years, you may have heard some experts warn of a lost decade – in other words, when stocks fail to produce a positive return for an extended period. The most common example of a lost decade came between 1999 and 2009, when the market suffered two major crashes, resulting in the S&P 500 producing a cumulative negative total return.

Could it happen again? It’s possible – but no one knows with certainty. High valuations are a warning signal for future returns, but they’re not an accurate prediction tool for market crashes.

Most importantly, there are several actions you and your financial advisor can take to protect your portfolios. If you find yourself in the “retirement risk zone,” here are the do’s and don’ts to mitigate the risk of a lower-return environment:

• DO focus on durable sources of return: Shift away from a growth-at-all-costs framework toward high-quality equities with consistent capital return profiles. In a muted return environment, dividends and buybacks become a more meaningful component of total return, while also reducing exposure to dilution risk from capital-intensive growth models.
• DO build liquidity buffers: Establish a dedicated 2–3 year reserve in cash and short-duration fixed income to reduce the need to sell equities during periods of market stress or stagnation early in retirement.
• DO stress-test planning assumptions: Financial plans should incorporate more conservative real return expectations to ensure sufficient margin of safety relative to historical averages that may no longer be reliable.
• DO de-leverage where appropriate: In a lower-return world, debt reduction can improve financial flexibility. Paying down liabilities effectively generates a risk-free return equal to the avoided interest expense, lowering the burden placed on portfolio performance.
• DO stay disciplined during periods of market volatility: Emotional decisions – particularly selling after significant market declines – can permanently reduce long-term returns.  Having a written investment plan, and reviewing it regularly with your financial advisor, can help investors stay focused on their long-term objectives.
• DON’T panic and abandon stocks: Growth is still required to offset inflation and support a retirement that could last decades. The better approach is to rebalance and broaden diversification beyond mega-cap winners. Diversification – not market timing – remains one of the most effective risk management tools.

We saved our biggest “don’t” for last – don’t make impulsive decisions based on trying to predict a lost decade. The best financial plan is the one that you create with your financial advisor, one that’s tailored to your specific circumstances and that’s diverse and robust enough to survive whatever economic conditions may rise.

Victor Hugo Marin is vice president, senior investment analyst at Tompkins Financial Advisors. Mike Lawhead is vice president, portfolio manager at Tompkins Financial Advisors. Learn more about Tompkins at https://www.tompkinsfinancialadvisors.com/