How to Minimize Risk in a Stagnant Market

The downside risk discussed in a previous post is one metric investors have to ensure their financial plan is properly insulated against market downturns and can withstand any potential losses. Understanding your exposure to risk will help you make better informed decisions.

In addition to identifying your downside risk, investors also should consider the impact of a stagnant market on their investments. Returns that stagnate for a decade or more can be most problematic for investors within the High-Risk Window – those in the range of 10 years before or after achieving financial independence.

What’s the likelihood that our economy is headed for a sustained period of lackluster results?

GMO, Jeremy Grantham’s private investment management firm serving institutional investors, forecasts a 7-year return of -3.1% for large U.S. stocks and -2.1% return for U.S. bonds. That forecast is a far cry from the long-term, historical average return of 6.5%. This is not a rosy picture.

While the forecast is not a guaranteed outcome, it is a forward-looking projection based on thorough research by GMO.

GMO is not the only organization forecasting a prolonged period of gloom in our economy’s future. Research Affiliates – an investment firm with $164.5 billion in assets under management based in Newport Beach, CA – released its forecast of the 10-year return for the S&P 500. Investors may be heading towards a dismal 1.3% rate of growth for stocks in this index.

While these predictions leave little cause for celebration – especially if you are in the High-Risk Window, there is hope. Investors can be proactive to offset the impact of returns that could be nearly zero or negative – when accounting for inflation – for years to come.

At Precedent Asset Management, we will work to minimize the impact of a stagnant market on your portfolio by:

  • Helping you understand the “sequence of returns” risk. This is the risk that short-term market volatility can significantly impact retirees in the High-Risk Window if withdrawals are not conducted in the most effective order. Withdrawal timing can have a major impact on your investment’s longevity. We will help you assess whether withdrawing cash in the current market climate would negatively impact your long-term ability to recoup losses after a market downturn.
  • Modeling worst-case scenario outcomes. Working with our financial planners is a great way to prepare strategies in the event that a worst case scenario occurs. Having a plan in place will mute the financial sting so you aren’t caught off guard. Sticking your head in the stand is just not a productive approach.
  • Leveraging strategies to preserve assets in a low-return decade. We can walk you through the process of determining your safe withdrawal rates, projecting investment goals based on retirement spending projections, and segment your retiree spending needs using the appropriate bucket strategy.

Market growth projections may give you pause if retirement is on the horizon. However, the financial planners at Precedent Asset Management are prepared to walk you through this decade protecting your assets and helping you achieve the quality of life you’ve been working towards.

Schedule an appointment to speak with a financial planner about how to minimize the risk of a stagnant economy on your investments today.