Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today by going to www.howtoretireontime.com, or if you wanna buy a physical copy, go to Amazon and search for the book, How to Retire On Time, and you can buy a copy there. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can cover it all. Now that said, please remember this is just a show.

It's not financial advice. But if you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here today.

Yep. Glad to be here.

Now David's gonna be reading your questions, and I'm gonna do my best to answer them. You can always submit your questions by texting them either to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to hey, Mike at how to retire on time dot com. Let's begin.

Hey, Mike. How do you recover when the markets go down?

That's an interesting question.

So first off, if you're asking the question, it probably means you didn't have a backup plan, and now you're saying, oh, shoot. I should have prepared for this. So I wrote a Kipling article years ago, and it says the four market patterns that people need to understand about their investments. The first one is the markets will dip basically every year. Markets go up and down.

We all know that they're gonna dip at some point. Yeah. The second one is, I think it was like one point eight years on average, the markets will correct. So correct means top to bottom, around 10% loss.

Okay.

It's a very normal thing. Sometimes we might just grow a little bit too much. Maybe there's some uncertainty in something, and the markets will pull back a little bit, and then they'll kind of realign themselves, and then continue to grow. No problem. Not something to be stressed about, if you know to expect it.

Yeah. Yeah. Every one point eight years or so, which right now, we're in a correction. It may get worse. It may get better.

We don't know. The third one is the markets tend to crash every seven to eight years, not literally every seven to eight years, but on average so I go back to like 1987, Black Monday, the markets crashed, recovered quickly, and that was a technological issue there. If you wanna ever nerd out, text your questions, why did the markets crash in 1987? We can talk about that as a a whole question segment. But Alright.

Then you've got 1990, Iraq invades Kuwait. That was a geopolitical event. The markets crashed. That's a three year difference. And then from 1990 to February, '10 years of up.

Bull market, up market, growth market, whatever you wanna call it.

Right.

So it's not every seven to eight years. It's just an average. In 2020, the markets crashed because of the pandemic. K? They recovered, thank goodness, pretty quickly.

And then in 2022, the markets had some uncertainty there. We don't wanna create the assumption that the markets crash every seven years, so you go to cash in the sixth year and then wait for the market to crash. That's not really a system.

That's you trying to time the market?

That's trying to time the market, and historically, no one has successfully consistently timed the market in their career. We all might get lucky once in a while. Sure. But luck's not a system. So the question, how do you recover when the markets go down?

First off, what's your system if the markets do go down? Because if you can ride out the down market and not sell, that's the ideal situation. If you can't, well then Yeah. Which rabbit hole do wanna go down first?

Yeah. Well, I mean, what do most people do? Like, if if they do have a system for when the markets crash, what does that system look like?

Usually, the system is most commonly you've got stocks, and you've got bonds or bond funds because bond funds are more liquid. And the idea is if the markets go down or they crash, the Fed would decrease rates, and that would make money cheaper, which allows for a quicker recovery. That doesn't mean that bond funds are directly connected to the Fed's overnight rate. They are influenced by. And so it's not like the Fed literally controls the ten year treasury rates.

Those are separate entities. This is often misunderstood. But the idea is if the markets crash and the Fed drops rates, then bond funds should increase in value, and if bond funds increase in value, then you're not losing as much in the market. That's why the sixty forty stock bond fund split is so popular, or the rule of 100. Rule of 100 says that your age is basically the percentage of assets you would have in bond funds.

Okay. So it's all theoretical. If you notice in 2022 and 2023 that the markets went down and bond funds lost money at the same time. So it's not a fail safe example. Bond funds, the more conservative ones, are gonna average 5% year over year average return.

And so I like to challenge this idea a little bit, back to your question, and say, okay. What's the purpose of a bond fund to lower your risk?

Okay.

Why wouldn't we look at bond fund alternatives that can't lose money but have upside potential? So if the markets go, it it can grow as well, and utilize those resources. Just a different way to approach it. Because when the 6040 research study happened, I can't remember what it was, but it was Harry Markowitz who won a Nobel Prize for this. Buffered ETFs didn't exist.

Fixed indexed annuities as bond fund alternatives didn't exist. Structured notes really weren't a commonly understood practice. So the game has completely changed. It's like saying, hey. When I built a house in the fifteen hundreds Yeah.

Yeah. These were the tools I have. Uh-huh. Today, I have many more tools to build a house. You want to adapt to the new tools that are available Yeah.

But yet, this 6040 split hasn't, in my opinion, updated to the tools that are available today.

Okay.

That's the original idea. So for me, I don't subscribe to the idea, and I don't think people should subscribe to the idea that your portfolio is basically this generic allocation percentages based on some arbitrary metric on trying to mitigate some sort of appropriate amount of risk that you're taking. It's like, oh, well, I can take so much risk, but not that much. Oh, that's a little too much. We need

to Where's the line drawn? Who

knows? It's completely arbitrary.

Sure.

And so if you put a plan together first, how much income do you need, and from what sources? Mhmm. Then you can start to look at your strategies, then you can start to look at your plan. Put the plan together first, look at the strategies, and then you put together a portfolio. When I say a portfolio, that's when you can decide, okay, how much do you need in bond fund alternatives or basically investments or products that have growth potential at or better than what a bond fund could offer, all things considered, but it can't go backwards.

And the reason why all of this matters is because the ups and downs really are irrelevant until the day you need to sell. So if you're 20 or 30 years old and you don't need the asset, the investment until your retirement, you can ride out these market up and downs.

The temptation would be, like, when you even though you know the market can fluctuate, when you actually see, like, the dollar signs going down, it's probably hard emotionally. Right? Like, oh, I should sell.

It's not real until you sell it. When you retire though, you need money. Yeah. And so we have this idea. I mean, we call it the reservoir, you could call it whatever you want.

I've heard people call the remote, the market buffer, whatever you wanna call it. But the idea is that when the markets go down, you have a part of your portfolio that's principal protected. So you can draw income from a source that doesn't accentuate the losses. So, you know, if the markets go down 30, is that the end of the world? No.

So if the markets go down 30%, you just need roughly two years to generate income, and you wanna recover. If your accounts go down 30%, it's a 43% return to break even. So now if your accounts go down 30%, and then you take out 4%, let's say as income, because you gotta pay the bills, gotta live your life, it's now a 50% return to breakeven. Now you've extended your roughly two year recovery to maybe three years of a recovery. So when you draw income out of an account that's lost money, you're accentuating losses, and you're extending the timeline it's gonna take to recover.

And so if you have these quick market crashes like 1987 and then 1990 or 2020, '20 '20 '2 ish, Right? You go down, you accentuate the loss, harder to recover, you get hit with another loss. That's a difficult issue. Yeah. K?

I wanna go back to the market patterns I was talking about earlier. The fourth one I didn't talk about. Oh. And that's the flat market cycle. The markets can basically produce 0% return for a ten plus year period of time.

Yeah. This is that problem that people need to really plan for. That's why this bond fund alternative category, it can't go backwards, it has upside potential. It helps people be in a situation to where, yeah, I don't need maybe 60% out of the portfolio. I don't need to touch that for ten years.

Because when the markets go down, I have this other source that I can draw income from, not accentuate the losses. But also if the markets go flat or whatever it might be, you're able to hedge against that. So there's a lot of things here Right.

At play. So how do you feel about shorting the market? Is that a strategy?

Yeah. Shorting the market's a very intense thing to do. So if you don't understand what shorting means, here's basically what it it kind of is. Okay? Let's use an easy example, eggs.

Price of eggs have gone up and down a lot.

Yeah. They have.

So let's say, David, I said, alright. David, I'm gonna sell you a price of eggs for, I don't know, $3.

Okay.

K? A dozen of eggs, I've sold it to you for $3. K? I've sold you the eggs, but I haven't given you the eggs yet. Now it's called basically selling on margin or borrowing.

I now have to go and buy the eggs to complete the transaction. So if I sell you eggs for $3, and then I go to the farmer and buy them from the farmer for $1, I've made money. Yeah. K? Because the price of eggs would have dropped.

Now if I sell you the eggs for $3, and then the price of eggs increase, and I go to the farmer and buy it for $5, I've lost money. Yeah. So shorting the market is selling something you don't have, and then you have to go buy back in. So the idea is if the markets go down, you're betting against the markets, you could, in theory, make money. Oh.

It's a very stressful thing to do, because what's the worst that could happen? Let's say you buy stock x y z. What's the worst that could happen to that stock? It goes to zero. Yeah.

You know the worst situation. If you were to buy it and hold it, you can only lose so much money. Uh-huh. How much could a stock grow in theory? Infinity and beyond.

Okay. So you have infinite downside risk if you short the market. Because if you were to short the market of a stock that keeps going up and up and up every time it goes up, you're losing money. Oh. Would I do it on my personal accounts?

I don't know. Maybe. If I'm willing to take the risks, but it is a very risky thing to do. The more badly you need a deal, the more likely you're gonna get a bad deal.

Oh, yeah.

So if you're looking to short the market to recover, keep your emotions in check, don't fall for it. So if you're holding on to a position or something like that, and you just wanna move on, it's okay to sell, cut your losses, maybe you can do some tax loss harvesting with it, and move on to something else. Okay. But don't hold on to a position just because you can't sell it at a loss. Follow your systems, not the sentiment, especially the sentiment of the market.

So, like, right now, the S and P top to bottom has lost 10%. If I had some cash on the side, it means, in my mind, that the market is on sale by a 10% discount. Mhmm. I could buy back in. And if I intend to hold it for a longer term period of time, it's a deal.

Yeah. If I'm in the market and I'm holding on to the positions, okay. As long as you don't need to sell right now and you can wait it out, it's not really a big deal. We wanna get past this. I need the ability to sell all of my assets at any given time, and I can never go backwards.

That's not how it works. If you have money in the market that's at risk, you gotta be able to ride out the risk. Risk is not just an up and down conversation. It's a timeline conversation. And if you've got large near term expenses, those expenses probably shouldn't be in the market.

Maybe you have some in high yield savings or in a CD. That might sound boring, but you can't time the market. Again, time the market is pulling out of the market, putting it in cash, or spending it. So we need to be more mindful about these sorts of things, be more mindful about the portfolio, be more mindful about the plan, and when you might need the money. Because when you retire is when you need money, because you need income, and if you need income, what does that look like?

So it it all comes together. Again, if you're in your twenties, thirties, or forties, it's really easy to ride the market out because you don't need the money until you retire. Yeah. But when you retire, we believe you need some of your assets in a protected source, so that when the markets do go down, you can still pay the bills without accentuating losses. That's all the time we've got for the show today.

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