All That Matters: Invest Your Age
In this month’s episode of All That Matters, Mike and Ross consider what the market’s remarkable run means for investors later in life. They discuss how time horizons, future spending needs and evolving goals can help investors balance protecting what they need today with staying invested for what lies ahead.
Ross: Welcome to All That Matters with Mike and Ross. Mike, we’re here at the beginning of September. We’ve vacated the professional-looking studio from our last episode and returned to our living rooms and fake backgrounds. Nevertheless, the content persists. Today, we’re talking through the markets and a timely question you received at a recent client event. You’ve been out on the road, and that’s where some of our best ideas come from because, at the end of the day, this is for our clients. That’s why we do this.
The Market’s Remarkable Run
Ross: As we move through the final third of the year and head into fall, it’s a good time to look at what the market has done so far. At the time of recording, the S&P 500 is up approximately 12% to 13%. That’s a great year, all things considered. But what makes the performance particularly encouraging is the reason behind it. We talk about this all the time: The market’s gains have been driven by earnings. Earnings are up more than 20%, which means the profits of the companies we own are growing and the stock market has actually become less expensive this year. Any year when the market rises for what I would consider the right reasons, reflecting economic growth, profit growth and great companies doing what they do best, is a really good year. It might be difficult to get excited about a 12% or 13% return after the run we’ve experienced, but investors should appreciate what’s driving it.
That brings me to you, my friend. You recently wrote a blog called “What a Run,” looking at this bull market and the importance of appreciating it while it’s happening.
Mike: Thanks, Ross. I wrote “What a Run” because I wanted investors to take a step back and put what we’ve experienced into perspective. I think it’s important for investors, clients, financial advisors and strategists to ask: Where are we, and what have we been through? The 2020s have been an exceptional time to be an investor. Over the last five and a half years, the stock market has annualized at around 16%, a pace eclipsed only by the 1980s and 1990s. So far, this has been one of the best decades ever to be an investor. Of course, past performance is no guarantee of future results. But consider the last four years. The S&P 500 is up approximately 12% this year, following gains of 17%, 25% and 26%. That doesn’t mean your account experienced those exact returns. Your portfolio may not be invested entirely in the stock market, and that’s perfectly reasonable. The point is to recognize the remarkable tailwind investors have experienced, not only over the last five years, but throughout their lives. The United States of America has provided an incredible tailwind for investors.
Investing at 70 and Beyond
Mike: After I wrote “What a Run,” I attended a client event where someone came up to me and said, “I’m 72. How should I think about this? You’re saying this is incredible, but I may not have the same time horizon to recover from a loss.” That’s the question I think we should ask ourselves. How should someone who is further along in life think about this market run and what might happen next?
Ross: It’s the right question. We’re bullish and optimistic, and there are reasons to believe this bull market could continue. But once you reach the point where you’re living from your portfolio, you have to think about risk differently. One useful framework is to think about your money and investments in buckets of time. If you need the money within the next one to three years for a major expense, it shouldn’t be invested in stocks. Even the most bullish investor should recognize that the market can decline significantly over one, two or occasionally three years. Stocks are long-term assets. They’re assets for growth. But if you don’t need the money for seven, 10 or more years, the calculation changes. Someone retiring at 70 may still have many expenses and many years ahead. Some of that money should remain allocated to equities. Thinking in terms of near-term expenses, medium-term expenses and long-term growth can help determine the appropriate asset mix. That’s an important conversation to have with your advisor.
Mike: I like to keep things simple. That’s one of the core beliefs behind my work.
- First, I don’t believe you can abandon equities completely. Equities should remain a fundamental part of a portfolio because fixed income in an inflationary environment presents another question. If inflation is 4% and you have a Treasury bill yielding 4%, your real return is effectively zero. The question isn’t whether to abandon equities. It’s determining the appropriate allocation for your age, circumstances and goals.
- Second, separate the money you’ll need from the money you may never need. Imagine you have a $5 million portfolio. Your financial plan shows that you’ll need $3 million to support a comfortable retirement. The remaining $2 million may be intended for a child, your family, a legacy or a nonprofit organization. That money has a much longer time horizon and may be invested differently. Could that portion of the portfolio decline? Of course. That’s always possible with equities. But its purpose and time horizon are fundamentally different from the money supporting your near-term lifestyle.
- Third, consider whether your definition of success has changed. When you’re younger, success may mean growing your wealth toward retirement. Once you’re retired, success may look different. You may no longer need to beat the market or feel like you’re missing out when you see returns of 17%, 25% or 26%. Success may simply mean maintaining your lifestyle, remaining comfortable and passing on a legacy.
Finally, ask yourself this question: If the stock market fell 40% next year, what would change about my life? Don’t just think about the question on your own. Go to your advisor and say, “Sit with me. Talk with me and my spouse. Show us what would happen if the stock market fell 40% next year. Model it for us so we can see it now.” When the next decline happens, whatever causes it will feel bad. Understanding its potential effect on your life before you’re in the middle of it can help you prepare.
Ross: Those are all reasonable considerations. There’s a perception that once you reach retirement, or even get close to it, you should give up on equities altogether. But that’s not necessarily the right response, particularly in an environment with inflation, rising healthcare costs and longer lifespans. We talk about artificial intelligence often. There’s a possibility that AI becomes so effective in areas such as drug discovery that it adds years to the average lifespan. Investors may still need the growth equities offer when they’re no longer working, even at age 75 or 80. It’s a real balance and a great conversation to have with an advisor. But I don’t think you lean out of equities entirely, even when someone on the news is declaring that the market is in a bubble or about to crash. Those warnings are inevitable. They’re going to keep coming.
What’s Ahead This Fall
Ross: Mike, I’m looking out my window at the first leaf turning red. It’s still 106 degrees here in Kentucky, so it doesn’t feel like fall yet. But it is September, and we’ve completed the first two-thirds of the year. What are you looking forward to? What does the Mike Antonelli fall look like?
Mike: I’m officially an empty nester now, so that’s an adventure in and of itself. Content-wise, we have a lot on deck. Midterm elections are coming up, and we’ll have plenty to say about them. We’ll certainly cover them on All That Matters. I also have a lot of client presentations coming up, so fall will be busy on the road. But I’ve said this before, Ross: October is the best month of the year. I think it’s by far the best month, and I have two pieces of evidence. There are five Saturdays in October. Five Saturdays. Let’s go. And Halloween is on a Saturday. I hope the weather starts feeling like fall soon because I am going to be in prime form this October.
Ross: I couldn’t agree more. Trick-or-treating and college football are coming up. Fall is the best time of year, assuming the temperature eventually gets below 100 degrees. We’ll also be back to discuss the midterm elections. Elections bring plenty of anxiety, but we’ll help set the record straight. In the meantime, talk with your Baird Financial Advisor. Year-end planning always arrives quickly, and the holidays come fast. Things are about to ramp up. We’ll be back in the big studio sometime soon. Until then, we’ll talk to you later.
This information has been developed by a member of Baird Wealth Solutions Group, a team of wealth management specialists who provide support to Baird Financial Advisor teams. The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider, and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page is Baird expert opinion today and is subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor, and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
