Why Timing The Market Never Works and Why Income Mapping is Important

Mark Elliot: Welcome back to the Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. Troy Sharpe is a certified financial planner professional. You can always check out the YouTube channel. Troy, Jessica, and the team just did, I guess you could call it the Oak Harvest Market Summit, and it’s on YouTube. You could watch this whole thing. There were 1,000 people who were watching it. I think average around 300 or 400. Really a neat opportunity for you to see how Troy, Jessica, and the team are looking at what’s going on in the world, how does it affect you. Just search for Troy Sharpe and Oak Harvest, put in the Market Summit, you’ll find that one very easily.

If you have questions, you can always call the team. It’s 800-822-6434. Today’s show is really the theme would be a 2022 guide to retirement. How do the current events in Ukraine, Russia, how does that affect us, and all of that. You were going through some crazy numbers. If we did not miss a day from ’01 to 2020 in the market, we’re up 7-some percent with our investments. If we missed the 10 days, it was down to three and a third. We missed the top 50 days, were negative. It’s really crazy when you think about that. You also wanted to get to the Fidelity study, the same type of study, I think.

Troy Sharpe: Same type of study, just over a little bit longer time frame. It tells the same story, but that one was really shocking. It was over the past 20 years. Something to note about the past 20 years, if we go back from ’01 to 2010, technically 2000 to ’09 was considered the lost decade, where the stock market actually averaged about -1% per year. The first time over a 10-year period, I believe that the market actually lost money over a 10-year period. It really has been a tale of two decades over the past 20 years.

Then after the ’08 crash, Federal Reserve intervenes, Congress intervenes as well. We start printing money to shore up the economy. Also, we print money to shore up the stock market through Quantitative Easing 1, Quantitative Easing 2, 3, Operation Twist, all of these different monetary policy programs that prop the stock market up. We average somewhere around 15% per year from 2010 to 2019, somewhere in that range. Then, of course, 2020, 2021 were excellent years in the market, above 15% returns. It really was a tale of two decades, but those numbers were shocking.

I think the biggest takeaway from what we just went through, and just for those tuning into the show now, from January 2001 to December 31st, 2020, if you were invested all the days, 7.47% was your average annual rate of return, but if you missed the best 30 days, it dropped to -1.49% per year. That’s if you miss the best 30 days over a 20-year period, your returns drop to -1.49% per year. If you miss the best 50 days out of that 20-year period, it drops to -5.21% per year. Your $10,000 invested at the beginning of ’01, 20 years later would be worth $3,430.

The second biggest takeaway here was that 7 of those best 10 days occurred within two weeks of the 10 worst days. What does that mean for you? When we have these geopolitical shocks, like Russia invading Ukraine, it’s important to understand that these things don’t impact corporate profits and the projection of future corporate profits to an extent to where the stock market actually is concerned long-term. Short-term, there are some shocks. We went through some of the numbers. Just to cover those again, really quick for those tuning in.

Ryan Detrick, chief marketing strategist at LPL, looked at 22 major non-financial shocks over the past 65 years. The events on average led to a one-day loss after the shock of about 1.1%. Total drawdowns on average from all of the various geopolitical events over the past 65 years took about 19.7 days to complete the drop, which was 4.8% drawdown from the time the event happened to the lowest point, that’s the average. Then it took about 43 days for the market to recover and be higher than it was before the shock. That’s where we see, okay, we have some of the market’s worst days, but then we get the rebound and we have some of the market’s best days.

That correlates to the studies that I’m going through here showing you, hey, if we’re out of the market during these best days, we take the loss, we start to panic, we get out, and then we miss the best days. Your returns over time drop substantially. You can go from averaging 7%, 8%, 9% per year to averaging 1%, 2%, 3% per year, maybe negative if you’re the type of person who’s constantly trying to react and emotionally allow those events to impact your investment strategy.

Looking at the Fidelity study, it goes back to 1980 and tells the same story, but this looks at an initial investment of $10,000. If you’re fully invested from January 1st, 1980, through March 31st, 2020, they choose March for some reason in this study, probably, because that was right before the COVID drop, but your 10,000 turns into 697,000. If you miss the best 5 days, your 10,000 only turns into 432. Missing the best 10 days turns into 313. Missing the best 30 days, only 115,000. If you miss the best 50 days, your $10,000 only turns into $48,000 over that 40-year period. The missed growth, if by missing the best 50 days, you missed out on $650,000 roughly.
Same story. Again, when the market reacts to these type of geopolitical events, the drawdown is not that severe, but when the headline news and you’re turning on the television or the radio or the internet, it can make us feel like the world is almost ending and we need to do something to get out of the market. I implore you, if you look at the data, if you understand how much of your portfolio should be invested in stocks, because you have a financial plan or a retirement plan, and you have someone that you can have these conversations with, you’re going to be in a much better position to not make these big mistakes.

Same story, but that is why when we look at the Oak Harvest Retirement 360 Plan, the Oak Harvest Retirement Process, it starts with identifying your portfolio’s capacity for risk, your emotional willingness to take risks, and then coming up with an investment strategy that suits not only your risk parameters but fits into the overall plan that helps us generate income so we can keep up with inflation, sustain our comfort of living. Then also, we overlay the tax plan on top of all that. Those three steps, they work together to provide a strategy to reduce taxes, provide increasing income, and not take more risks than your portfolio should take in order to meet those objectives.

I want to talk a little bit about income mapping here because this is really step two of our process, it’s step two of the plan that our clients receive. It really needs to go in this order because if we don’t identify the proper investment strategy, how can we ever generate a plan for income? There is no retirement without income. One of the first things that we’ll do when a client comes in, a prospective client, is we’ll build what we internally call an income map, essentially.

What we’re going to do is look at a secure income chart, or first and foremost, we’re going to identify your estimated spending plans. A lot of times our clients will have what we call a go-go or a slow-go plan, where you want to spend $100,000 a year for the first 8 years of retirement, maybe 10 years, then we’re getting a little bit older, we’re gonna drop that down to maybe 75,000 a year. Of course, all of this is inflation-adjusted. We’ll start to map out that spending goal or start to identify that spending plan, because we’re a retirement planning firm. Again, this is what needs to be done.

Then we’ll map out your guaranteed income sources. Social Security, it’s a guaranteed income. If you have a pension, it’s a guaranteed income. If you have annuities, that’s guaranteed income. What that allows us to do is to then identify the gap, or how much we need to withdraw from the portfolio to identify where are we? Are we in a good shape here? Are these portfolio distributions in the 2%, 3% range? Are they in the 4%, 5%, 6% range? Then what happens when we look at taxes? Because if you do a simple analysis, and you need to pull out, let’s say 40,000, and you have a million dollars, that’s 4%. You’ve read articles for decades, or at least for many years, telling you the 4% is an adequate distribution rate in retirement, and you have a very good probability of not running out of money over a 30-year period.

I’m not going to get into it right now how antiquated those studies are, because they happened in a time period when interest rates for your bond portfolio were much higher, not to mention the declining interest rate environment we’ve had over the past 30 years, which results in increasing or capital appreciation to your bond allocation. The whole different story that makes that analysis invalid in today’s market environment.

What I am going to focus on is when you do that simple analysis and you don’t take into account taxes, not just taxes today, but taxes over a long period of time, you’ve sold yourself short, because it’s an inaccurate analysis. You probably don’t need to actually pull out 4%, you probably need to pull out closer to 4.5%, 5%, 5.5% depending on what those numbers are, how much other income you have, whether you’re married or single, because all of these things impact our taxable income, which determines what bracket we go into. We also have to extrapolate all of these numbers out over the next 20 to 30 years because RMDs force you to take a lot more out.

This is what we do with your retirement plan. This is what we do from an income planning, investment planning, tax planning. It’s all worked into our process here and it’s all worked into the plan that our clients receive. Phone number is 1-800-822-6434. Give us a call, let’s sit down, have a conversation about your retirement.

Mark Elliot: 800-822-6434 to chat with the team at Oak Harvest here to help. 800-822-6434. Stay with us. Troy’s right back. This is The Retirement Income Show.