I quit my full-time job in December 2019, three months before a global pandemic shut down the world. I watched my investments fall by 34% in the sharpest and most rapid market decline in history. I cancelled two European vacations.
While I did get a three-month head start on the whole work-from-home thing, my routine was quickly disrupted when schools shut down and my kids were sent home for online “learning”.
I dreamt of building my blog, writing, and financial planning business while travelling and working from anywhere with an internet connection. Life comes at you fast.
Instead of panicking and thinking I made a huge mistake, I stepped back and checked in on my plan. I still had a popular blog with a strong readership of people who respected my opinion. I had a secure freelance writing gig with no shortage of financial topics to write about. And I had a growing financial planning practice with an eager waitlist of clients.
Stuck at home, I doubled down on my business – writing more articles, taking on a reasonable number of clients, and finishing up the work to earn my financial planning designation.
As we know, stock markets went on to recover their early 2020 losses and then some. My investments returned between 9 – 12% that year, depending on the account type. The LIRA I set up in April 2020 went on to return 22.5% thanks to the fortuitous timing of that lump sum contribution.
Business boomed that year and again in 2021 thanks to the work that my wife and I put in laying the foundation in early 2020.
Fast forward to 2022 and markets are reeling again (although nowhere near as bad as March 2020). I’m still invested in Vanguard’s All Equity ETF (VEQT) across all accounts. I’m adding new money every month to our corporate investing account, picking up more units of VEQT at a discount. The way I see it, these new contributions have a higher expected return (over the long term) than they did 6-12 months ago.
Related: Exactly How I Invest My Own Money
Business is still strong, but I’ve lost a freelance writing client that made up a good chunk of income. I’m using that gift of time to work on a project that I believe can replace the missing income and fill a void in the market for want-to-be DIY investors, so stay tuned for that.
Meanwhile, I have clients at different ages and stages wondering how all of this *waves hands at everything* is going to impact their financial plan.
Should we change long-term inflation projections to 6% annually? Should we stay working for another year or more until all of this settles down? Should we sell our sensible investment portfolio and park the money in cash?
When I meet with clients I encourage them to zoom out and take a bigger picture view of their financial plan and future goals.
Are they still in their accumulation years? Are they still making regular contributions to meet their savings and investment goals?
Is their job secure? Have they negotiated a salary increase commensurate with the current inflation environment and tight labour market?
Have they looked at their own personal inflation calculator to see how their own spending stacks up against the CPI (our spending has trailed CPI by 0.6 – 2.5% over the past 12 months). Have they built in a spending buffer for the year to account for higher inflation and any unplanned minor expenses?
Clients who are retired or getting close to retirement age may be more concerned about high inflation and poor investment returns. I remind them to focus on what they can control.
Perhaps a large one-time purchase gets delayed, for example. In most cases, we’ve built a buffer into their retirement spending that can be used for extra travel or hobby spending in good times, but can also help curb the rising cost of groceries and gas during higher inflation periods like this, or cover an unplanned expense.
I remind them of their safe withdrawal plan and that withdrawals can be spread out over the entire year (dollar-cost-averaging in reverse).
Related: Your Retirement Readiness Checklist
FP Canada issues guidelines every year that are designed to support financial planners when making long-term (10 or years more) financial projections. The projection assumption guidelines look at items like expected wage growth (3.1%), borrowing rates (4.3%), inflation (2.1%), fixed income returns (2.8%), and stock returns (6.3% to 7.7% before fees).
Knowing the questions planners would be facing this year regarding inflation and stock return assumptions, FP Canada included some helpful guidance for planners to share with clients:
“It is not unusual for significant fluctuations to occur in the market over a short period of time. For example, a financial planner may be preparing a financial plan at a point in time following a marked increase in the stock market, or planning may occur following a major decline in the stock market.
Movements and fluctuations can also be seen in the release of Consumer Price Index results, such as a negative rate in May 2020 and then a rate near 5% in December 2021. In looking at a 2-year rolling average, 94% of the time the inflation rate was between 1%-3%, compared to 73% on a one year time frame. As of December 2021, CPI has averaged 2.32% over the last five years and 1.82% over the last 10 years.
Based on the current economic conditions, financial planners may be tempted to drastically change just one assumption, like increasing inflation to 4% for the entire retirement planning projection. By revising only the rate for inflation, the financial planner ignores the correlation that exists between inflation and interest rates and the cited asset classes. If inflation remains high, interest rates would typically go up, as well as the return on equities over the long-term. We recommend that financial planners use the projected economic assumptions as a whole and avoid attempting to personalize a forecast for the client by making a drastic adjustment to a single variable. Presenting alternate scenarios and projections to the client may be a better approach.”
Inflation will be tamed in time. Investment returns will increase in time. We have no idea when, or what will happen in the short-term. But we have much better information about long-term trends.
For instance, if expected global stock returns are between 6-8% per year on average over the very long term, and the previous 10-year period averaged 12.66% per year, that should tell us to expect lower returns over potentially the next decade. We should also expect a negative year from time-to-time. What we shouldn’t expect is global stocks to continue posting double-digit returns every single year.
Viewed through that lens and it’s no surprise to see that stocks are down so far this year. Does that mean you need to change your perfectly sensible portfolio of low cost ETFs? Of course not. Falling stock prices is a feature of their risk-reward trade-off, not a bug. But those who stick to their sensible strategy tend to be rewarded over the long term.
They say plans are worthless but planning is everything. Check in on your financial plan. Do the decisions you made at the time still hold up? Or should they change based on new information?
It’s normal to have second thoughts about your financial decision making when faced with high inflation, declining stock prices, a global pandemic, or an unprovoked invasion marking the biggest war in Europe since World War Two.
There’s no need to tinker with a low cost, globally diversified, and risk appropriate portfolio. It didn’t “stop working” just because prices have fallen. As Ben Felix says, your investment strategy shouldn’t change based on current market conditions.
Indeed, for those in their accumulating years, take advantage of falling stock prices and keep adding to your portfolio (just like it said to do in your financial plan).
If you’re in the retirement readiness zone, and nervous about your investments and inflation, it’s certainly reasonable to consider postponing retirement until the situation improves. Check in on your financial plan anyway, just to make sure you’re not just falling into the “one-more-year” trap.
Finally, if you’re already retired and spending down your investments then this environment can feel downright nasty. A financial check-in might be in order to see if your level of spending is sustainable, your investments appropriately allocated, and that your other assets and income streams have been optimized in your retirement plan.
Decisions can be revisited, like when to take CPP and OAS (if you haven’t already), whether you should downsize, or sell your home and rent, whether to complete that kitchen renovation or put it off for a year or two. These choices, that are within your control, can positively affect your retirement plan – more so than trying to hit a home run with your investments to make up for 2022’s losses.
If you’re ever looking for a sober second thought – an unbiased look at your financial plan and future goals – check out my fee-only advice page and give me a shout. I’d love to help.