Have your retirement plans been compromised given the stock market’s recent decline?

It depends, in part, on when you need retirement income from your portfolio.

You have been diligently saving for your retirement. And if you are still working, please continue to save, especially during down markets. If you are near or in retirement, you no doubt find the recent market decline unsettling. Have you been thinking that you wish you had sold some stock back earlier in February? Are you asking yourself, “Should I sell now and minimize the possibility of any further loss?”

If the markets do continue to decline, selling now could prove to be a great decision as long as you are able to make a prescient decision about when to buy back in. Our concern is turning temporary, paper losses into permanent losses by selling into the teeth of a market correction, and then not buying back in at the lows to recoup those losses.

Are investors better off to stay the course, banking on a market recovery, and “ride the roller coaster” than to attempt to market time sells and buys? If you don’t sell, are you comfortable with your portfolio’s current asset allocation?


A general rule of portfolio construction is: When you need your money determines how you should invest your money.
The timing and dollar amount of income distributions from your retirement portfolio dictates the percentage of your portfolio that should be invested in stock. Or to say it another way, do you have enough cash and bonds in your portfolio to provide you with income for a long enough period of time to be paid for the risk you are taking investing in stocks?

Stock investments are critical to your ability to create a hedge for your income against a long-term loss of purchasing power due to inflation. You want the ability to determine the timing of your stock sales versus being forced to sell stocks—perhaps at a loss—in order to generate retirement income. You want the luxury to maintain stock investments through tough market conditions like the one we are currently experiencing in order to sell at a higher market valuation if only to recoup any paper losses that might result from a market decline.

If you have too large an allocation to stocks given your income needs, then yes, your retirement plans may be at risk. How do you know the proper amount that should be invested in stocks? You undertake a retirement income feasibility study which will help determine the amount and the timing of distributions from your portfolio—income that should come from conservative cash and bond investments.

How long a period of time should you “bank” income distributions by investing in cash and bonds? Ultimately, your tolerance to accept investment risk is the primary consideration. Otherwise—and again depending on your risk tolerance—5 to 10 years.

A prudently constructed portfolio reflects the following assumptions:

  • When funding short-term objectives, invest conservatively;
  • When funding longer-term objectives, invest for growth; and
  • Short-term periods of negative portfolio performance can be offset over the long-term with subsequent periods of positive market performance.

One big challenge when investing is to characterize a goal as short-term or long-term. Your tolerance for investment risk will help make that determination—a decision aided by your understanding of the historical performance of bull and bear markets.

NWCM developed a “calculator” as a tool to help investors better understand market volatility and to visualize how prudent portfolios can withstand the inevitable losses during market conditions like the current one. It’s been available online since 2017 without cost to all investors, in large part because NWCM sees investor education as part of its B Corp mission. Clients of NWCM can call us and request a one-on-one meeting during which we will use the calculator together in a review of their portfolio’s risk exposure. Clients and the public alike will find the following tutorial informative, as well as some of the conclusions we make about portfolio construction. Also, use of the calculator can give you confidence in the underlying investment strategy for your portfolio.


To access the calculator, click here. Alternatively, browse to NWCM.com, and click on CapitalYou from the Main Menu. Then click on the icon that is for Financial Calculators. Now select Investment Risk. Select Historical Volatility Calculator. (If you wish, you can take the Risk Questionnaire later.) To the right of the pie chart, click on the tab labeled Benchmark. Your screen should look like this:

Have your retirement plans been compromised

Click on the small, brown box on a bar underneath the pie chart. While pressing down on your left mouse button, move the brown box to the far left and to the far right. (Alternatively, you can click on the brown box and then use the right and left arrow keys on your keyboard to move the box more precisely.)

Note how both the pie chart and the data in the table on the Benchmark tab change. We constructed 120 different portfolios whose mix of stocks, bonds and cash, both U.S. and foreign, reflect a wide range of an investor’s tolerance for risk, from conservative (all cash) to aggressive (all stock). The table on the Benchmark tab details the varying allocations to asset classes within the 120 portfolios.

Now click on the Market Risk tab. Also, move the brown box to the far right to set the portfolio allocation to 100% Equities (all stock).

On this tab, you see six columns of data for Quarter, 1 Year, 2 Year, 3 Year, 5 Year and 10 Year holding periods. For each of the 120 portfolios, we calculated the investment performance for all of the possible holding periods during the past 44+ years: 1/1/1976 through 2/29/2020, a period representing significant market performance, both up and down, including the decline of the past month. We ranked for each holding period the returns for each of the 120 portfolios from best to worst. Given the portfolio selected under the pie chart, we report that portfolio’s returns on the Market Risk tab.

Let’s use the 1 Year holding period for a 100% equity portfolio to more fully explain our methodology.

Since January 1976 (the start of our market index data) there have been 44 calendar years (January 1 through December 31). But there have been an additional 475 12-month “rolling periods” starting on the first day on any month, e.g., a February 1, a June 1, or a November 1. We calculated returns for these additional holding periods so that our data base would better reflect periods during which an investor might have owned one of the 120 portfolios. The result is a data set of 519 1 Year holding period returns.

Look at the table whose heading is 1 Year. The best 1 Year performance of a 100% stock portfolio in the past 44-plus years was 60.2%, and the worst return was a negative 47.8%. The median return was 14.2%. The 25th ranked return was 21.8% and the 75th ranked return was 3.4%. (This segmentation of returns in 25 percentiles represents “quartiles”.)

The table also reports the Most Recent Performance for the 1 Year ending this past month: 3.7%. That return falls near the very bottom of the third quartile of all 12-month returns over the past 44 years. Let’s call it the 74th percentile. (The last Quarter’s return ranks at about the 92nd percentile but the 10 Year return is an annually compounded 9.9%!)

We calculated annually compounded returns using the same methodology for longer rolling periods ranging from 2 years to 10 years. Note how the range of calculated returns from high to low begins to narrow considerably the longer a portfolio is owned. The 1 Year returns have a spread of 108 percentage points, while the 10 Year returns vary by 21.5 percentage points. A huge difference!

How often were returns positive and negative for this all-stock portfolio over various holding periods? Look to the table for those statistics. As a general rule, the instances in which a portfolio lost money decline the longer the portfolio is maintained: poor periods of market performance are offset by good market performance.


Answer the following question while looking at the Market Risk data tab in the calculator: If you had a sum of money which you needed within the next year, is the possibility of making a 10%, 20% or higher rate of return on those funds by investing in an all stock portfolio worth the risk that you might lose up to 48%? Probably not. For short-term objectives, the prudent decision would be to invest conservatively, e.g., a portfolio of cash and short-term fixed income securities.

But if you didn’t need that sum of money for many years, would stock investments and the risk of a loss be worth the possibility of an attractive gain? It should be—and is needed to offset the loss of purchasing power due to inflation. For longer-term objectives, a prudent decision could be to invest more growth, e.g., a portfolio that is invested in stock.

Should part of your portfolio be invested conservatively for the retirement income you need in the near-term and another part invested for the income you need over the long-term? One big challenge when investing is determining if a goal is short-term or long-term. When planning for your retirement, an income feasibility study is critical to make this determination—and for the proper allocation of your portfolio among stocks, bonds and cash.


Now let’s answer the question we first asked: Have your retirement plans been compromised given the stock market’s recent decline?

With the Market Risk tab displayed, move the brown box under the pie chart to the percentage of Equities that is your portfolio’s current allocation.

Shorter holding periods have shown significant declines in value. Would it be fair to say, “gut-wrenching losses?” The losses are limited to market conditions that represented performance in the bottom quartile, e.g., some of the worst. (Are we at the start of one of those markets?) And over longer periods of time, have those losses been recouped if the stock exposure was maintained? Many investors want to sell into the teeth of a market decline. That can prove to be an effective investment strategy if one has the prescience to then get back into the market at a lower valuation. Such effective market timing is tough to accomplish!

Look at the data at the very bottom of the calculator where the worst three market losses for this portfolio are detailed. Note the duration of each decline, and then how long it took to recover—confirmation that maintaining an investment strategy can allow for recovery of losses. (Does this affect your decision about what is a short-term goal versus a long-term goal?)

No doubt historically there have been 12-month periods in which a prudently diversified portfolio with your stock allocation would have performed more poorly than yours in the past 12 months. But over longer holding periods, a portfolio like yours may have generated investment returns less than what your retirement income projections require.

Click on the tab titled Confidence. The bottom quartile data is identified with more percentile returns detailed to give you a better sense of the frequency with which investment returns have occurred. What is the minimum, long-term rate of return you need from your investment portfolio? What is the frequency with which that rate of return has been earned over the long-term: 75%? 85%? 90%? Is that frequency high enough to give you some confidence that your retirement plans are not at risk—particularly if the markets ultimately deliver better returns?


There is certainly the possibility that we are a month into a 12-month period in which your portfolio could perform as poorly or worse than what we have seen historically.

Notwithstanding anything written above, the main consideration for an allocation of stocks within your portfolio is your ability to tolerate investment risk. The stock market has performed great over the past 10 years and you likely have considerable gains in your portfolio—even after last week’s correction. Younger investors with long-term retirement horizons should be able to tolerate the volatility of the stock market. Investors closer to, or in retirement generally do not have as high a tolerance for risk. Have you undertaken a retirement income feasibility study? Do you know how much income you need from your portfolios in the coming years? If the market were to decline another 10-15% would you stay invested? If you have adequate cash and bond investments, consider staying put. However, if you would be inclined to sell, consider taking some profits now rather than selling later and possibly suffering further losses.

If you have questions about the allocation of your portfolio among stocks, bonds and cash, please call us to discuss.