Weekly Economic and Stock Market Commentary: September 19, 2022

Well, that didn’t go very well last week. Investors gave an adamant thumbs down to the August inflation reports. The major market averages turned sharply lower immediately after the announcement and continued until market closing. The market had its worst day in over 2 years and the worst week of the year.

I had some interesting conversations last week with some industry colleagues regarding investor behavior and why I consider investment performance important.

The next few paragraphs will be math problems, over-simplified. If you don’t care for my doing math, feel free to skip ahead.

Let’s start with a hypothetical couple who are age 50, have $500,000 in various investment accounts, contribute $25,000 a year to the investments, plan to retire at 65, and need a 7% annual rate of return to make their retirement number, which is slightly more than $2,000,000.

Suppose all goes according to the schedule for the 1st 5 years, at the end of which they will have $855,104. Then, they lose 10% for the year. That would bring them to $769,597. If the next 9 years provide the scheduled/assumed return in this example, at age 65, they will have about $1,884,000. To get to the originally projected value of about 2,051,000, they will need an 8% annual return, which is high, but within reason.

Let’s change one of the variables – the timing of when the difficult market hits. Instead of year 6, it occurs in year 11.

In this example, they get the projected returns until age 60, at which time they have $1,353,165. Then they get a 10% decline over the next year. That drops the account to $1,217,849. With four years left until retirement, the anticipated 7% return gets them to $1,715,120. To get to the originally projected number would take a rate of return that is too high by industry regulations for me to report. This is an example of what is known as the “sequence of returns” and how it can be either positive or negative depending upon any particular point in time and the yet unknown sequence of returns still looming in the near future.

There are a couple of morals to the story. First, markets can and do go down. Second, loss reduction/mitigation is more important as you get higher account values.

That is why I use the strategy I do. Most of the time, I am successful at mitigating the loss, and sometimes I am not.

Please take special note of the words above: “…markets can and do, go down”. Yes, we all know this is true. However, if that truism or the looming unknown sequences of return places you in a category of worrying about your retirement cash flow, it is imperative that we speak. We should discuss alternate methods with an eye toward making certain you have retirement income no matter what may happen in the markets.

The indicators had a rough week, with the OTC Bullish Percent Indicator heading below the 30 percent level. Of course, that didn’t mean much earlier this year. We shall continue with WEALTH PRESERVATION.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of September 16, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note: