Over the last few years, we’ve witnessed widespread financial hardship and market volatility that’s left many retirees questioning the safety of their investments. The current economic climate is uncertain, to say the least. What we’re experiencing today isn’t, or at least shouldn’t be a shock or surprise. Inflation and recession and the rise and fall of markets are historically “normal.”
Understanding Market Cycles
Markets go through cycles of growth and decline, and it’s important to understand where we currently are in the cycle. In a recession (which is likely the case today), the market experiences a decline in economic activity and a decrease in stock prices.
It’s important to remember that recessions are a normal part of the economic cycle and are followed by periods of growth. If you’re retired, and you’ve paid attention to the economy throughout your life, you’ve witnessed this yourself. By identifying where the market is in these cycles, retirees can make better-informed decisions about when to invest and when to hold off.
Assessing Personal Financial Health
Before making any investment decisions, it’s essential to assess your personal financial health. This includes understanding your current savings and income, as well as any potential sources of additional retirement income. It’s important to make sure that your savings and income are sufficient to support your lifestyle and to have a cushion for unexpected expenses even through financial droughts. Understanding where you are in terms of financial health will help you make better choices when it comes to investment decisions.
Diversifying Investments
Diversifying your investments is crucial in any market climate – even this one. A diversified portfolio includes a mix of different types of assets, such as stocks, bonds, and real estate. This helps to spread out the risk and ensures that a decline in one type of investment won’t significantly impact your overall portfolio. Diversifying also allows retirees to capitalize on different market conditions and sectors. A financial advisor can help you create a diversified portfolio that aligns with your investment goals and risk tolerance. But some retirees prefer to take the wheel and manage their money on their own. In either case, having an understanding of investment strategies helps with making confident decisions that you’re making on your own, or with the help of an advisor.
Let’s look at a few ways the economy affects investments, particularly the stock market.
How a Recession Can Affect the Stock Market
During a recession, companies may experience a decrease in revenue and profits, causing their stock prices to decline – sometimes, as we’ve seen over the last year – dramatically. During times like these, investors may become more risk-averse and move their money out of stocks and into safer investments like bonds. This can lead to a decrease in demand for stocks, causing prices to fall further. It’s important to remember that recessions are typically followed by periods of economic growth, and as the economy recovers, stock prices may rebound.
Take a look at this chart. It shows how the past 5 recessions have played out over time. Each time we entered a recession, no matter how long it lasted, the recovery came, and not only did the markets recover, they went even higher than they were when the recession began.
Let’s take a look at how the last 5 recessions affected the Dow Jones Industrial Average.
| Year(s) | Length (months) | DJIA at Start | DJIA at End | Time to Pre-Recession High (months) |
|---|---|---|---|---|
| 2020 | 8 | 27,362 | 25,934 | ongoing |
| 2007-2009 | 18 | 14,164 | 8,776 | 22 |
| 2001 | 8 | 11,722 | 8,341 | 24 |
| 1990-1991 | 8 | 2,365 | 2,636 | 3 |
| 1981-1982 | 16 | 875 | 964 | 10 |
Now let’s take a look at how the last 5 recessions affected the Nasdaq.
| Year(s) | Length (months) | Nasdaq at Start | Nasdaq at End | Time to Pre-Recession High (months) |
|---|---|---|---|---|
| 2020 | 8 | 9,638 | 10,048 | ongoing |
| 2007-2009 | 18 | 2,689 | 1,268 | 24 |
| 2001 | 8 | 2,470 | 1,573 | 24 |
| 1990-1991 | 8 | 430 | 474 | 6 |
| 1981-1982 | 16 | 156 | 198 | 24 |
Please note that the above table is based on approximate data and serves as an example and it's not conclusive data. Also, it should be noted that the stock market is not the same as the economy and a recession does not necessarily mean that the stock market will perform poorly and vice versa. The table provides a general idea about the stock market performance during past recessions, and it's important to consult with a financial advisor for personalized and more accurate information.
It’s important to keep in mind that these numbers are approximate and based on historic data. The stock market is subject to many factors and can vary greatly from one recession to the next, so it’s important to consult with a financial advisor for personalized and more accurate information. It’s also important to note that reaching the pre-recession high is not the only measure of market recovery. The stock market can recover and perform well even if it doesn’t reach the exact pre-recession high.
So, as a Retiree, When is it Safe to Jump Back into the Stock Market?
It’s important to note that nobody can know for sure when it’s 100% safe to re-enter the stock market. Even experts can’t predict it exactly. If you follow financial news commentary you’re well aware that there are always “experts” who tend toward extremes. It’s best to filter out the extreme opinions for the sake of caution – especially if you’re already retired or close to retirement. It’s important to be patient and not to make hasty decisions when the market is down, but also to keep an eye on the signs that may indicate that the market is starting to recover.
In a best-case scenario, either you or your financial advisor moved your money into cash or other relatively safe positions during the market decline. This is done so your money can be converted to cash quickly when the opportunity to buy stocks again presents itself.
So let’s assume you have cash available and are ready to jump back into the stock market when you determine the time is right.
Here are a few signs that might show that the market is near the bottom and may be in a position to begin recovery:
1. Stock Prices Stop Falling as Quickly as They Were Before.
As a recession is nearing its end, the economy is starting to recover and businesses are beginning to see improved sales and profits. This improved financial performance leads to an increase in stock prices as investors are more optimistic about the future prospects of these companies.
2. The Federal Reserve Lowers Interest Rates – or at Least Indicate That Rate Hikes Will Not be Necessary
As the economy begins to recover, the Federal Reserve and other central banks may also take actions such as lowering interest rates which makes borrowing cheaper and encourages spending. This increased spending and borrowing can also be a catalyst for stock prices to rise.
When this happens, people and companies start feeling more financially secure, and confidence rises. At this point, businesses become more likely to invest in growth. When individual investors see this, they may become more confident about re-entering the stock market. This, in turn, can lead to an increase in stock prices.
3. When the Consensus of “Experts” Begin Declaring That Stocks are Undervalued
When experts and analysts start saying that stocks are undervalued, which means they are cheap and a good buy. As mentioned earlier, professional opinions can differ so don’t rely on a single voice – wait until there is some alignment among professional opinions.
4. When Market Indicators Such as Dow Jones Industrial Average or S&P500 Level off or Increase
The Dow Jones Industrial Average (DJIA) and S&P 500 are like scores for the stock market. Just like how you get a score for a game you play, the stock market gets a score too. When the economy is doing good, the stock market score is high, but when the economy is not doing good, the stock market score goes down.
During a recession, the stock market’s score goes down a lot because people and companies are not doing as well and they don’t want to invest as much in the stock market. But as the economy starts to get better, the stock market score starts to go up again because companies are making more money and people are feeling more confident about investing in the stock market again.
When the DJIA or S&P 500 stop going down as much or start going up, it’s a sign that the stock market is getting better and that the bad times might be over. But it’s important to remember that the stock market score can change a lot and sometimes it’s hard to know for sure if the bad times are over. It takes experience and education to be able to identify a true reversal and even experts can get faked out.
A couple of additional “Tips” for retired investors…
Take Care to Diversify Your Investments
Diversifying your investments is crucial in any market climate. A diversified portfolio includes a mix of different types of assets, such as stocks, bonds, and real estate. This helps to spread out the risk and ensures that a decline in one type of investment won’t significantly impact your overall portfolio. Diversifying also allows retirees to capitalize on different market conditions and sectors.
How Inflation Can Affect the Stock Market
Inflation, or the sustained increase in the general price level of goods and services, can also have a significant impact on the stock market. As prices rise, the purchasing power of investors’ money decreases, which can lead to a decline in demand for stocks. Additionally, companies may experience increased costs, which can negatively impact their profits and stock prices. However, some companies may be better equipped to handle inflation, such as those in the consumer staples or utilities sectors, which may see an increase in demand for their products and services as a result.
Seeking Professional Advice
Consulting a financial advisor can be extremely beneficial for retirees. A financial advisor can provide valuable guidance and help retirees navigate the complex world of investments. They can also help retirees create a personalized investment plan that aligns with their goals and risk tolerance. Unless you are an expert yourself, it’s important to find a trustworthy financial advisor who has a proven track record of success and who is a fiduciary, meaning they are legally obligated to act in the best interest of their clients.
Please note that the information provided in this article is for informational purposes only and should not be construed as financial advice. The contents of this article may not be appropriate for your personal financial situation and it is important to consult with a financial advisor before making any investment decisions. Additionally, past performance does not guarantee future results and the stock market is subject to fluctuations and risks. Investing in the stock market involves the risk of loss and investors should carefully consider their risk tolerance before investing. The author and publisher of this article do not assume any responsibility for any losses or damages resulting from the use of this information.