The Psychological Effect Of Watching A Portfolio Slowly Disintegrate

There is something fascinating about writing. When I target a topic, I get so much inspiration that I’m able to write an entire series. This is exactly what happened during the month of February, when I wrote about investing and retirement.

What fascinates me is that no matter how much time I spend thinking of my topic and twisting it one way or another, there is always something else to write about. As I was about to tweet about my achievement of the day (which was being able to build an Orc Army... hahaha!), a reader reached out to me with a more serious matter:

You are right, John. We don’t talk enough about the psychological effect of seeing your portfolio dying slowly. The whole industry is about saving, investing and managing your portfolio for retirement. Funny enough, there isn’t much literature about what happens next.

How does it feel to look at your melting portfolio?

I know, some of you were much disciplined investors with the ability to build a nest egg so strong that you can live off your dividend and not touch your capital. This is quite an achievement that most investors will not reach. I know for a fact that I won’t make it to this point, because I would rather rent a vacation property for a week during spring break with my family, going to Guatemala with my wife and exploring the maritime with my RV next summer. Oh, did I tell you I’m going to Vietnam for 2 months in early 2019? Yeah, that’s why I will build a big portfolio, but not big enough to support my lifestyle with dividend payments only.

When I look at my portfolio on a bad year and I see that I’m losing money on paper, I always feel a small sting in my spine. But it doesn’t last long as I know that my portfolio is well-built and that my dividend will continue to grow. However, I remember discussing the real meltdown problem with my clients.

The moment you stop making money, you stop saving. Then, you are forced to withdraw from your portfolio. This is the point of no return. Each month, your portfolio drops a little. It’s like there was a small hole in your wine bottle and you don’t get to drink it all, as the wine is leaking slowly on the other side. You feel helpless because there is no way you can put money back in. You have worked very hard your whole life, only to see your greatest financial achievement reaching sunset as you grow older.

It gets worse when you hit a market correction. Then, you really feel like the boat is leaking from everywhere. How can you master your emotions and enjoy your retirement when your money is running away from you?

There is one thing I’ve learned about fear

During my 1-year RV trip in Central America, I had multiple opportunities to master my fears. This is how I realized that fear is very powerful, but happens only in a single place: your mind. The emotion of fear is fueled by the unknown. Since our brain can’t figure out what is coming next, it tells you it must be bad. What if this... what if that... and so on.

When you start withdrawing from your portfolio, you don’t know exactly what’s coming up next. You see the value of your portfolio going down, you see the market pushing it further and then you think you are going to go broke. You have been conditioned your whole life to save and accumulate. For the first time, you have to learn the other way around: spend and withdraw.

You will fear that your portfolio drops too fast. You will fear that you won’t have enough. You will fear being forced to sell your house. You will fear living in a small apartment and dying poor after you worked so hard for that retirement.

Do you really have to fear? How can you continue to sleep well at night? The only thing that will put the fear back in its cage is knowledge. If you know, you won’t fear anymore.

The most boring financial advice ever

Do you know how I saved my clients from their worst nightmare? I did it with the most boring financial advice ever: I wrote down a retirement plan for them, and we reviewed it yearly. The only way you will not panic about how much you withdraw each month is by knowing you can safely do it. The financial plan retirement is crucial. It’s your roadmap to a good night’s sleep. A good plan will show you the evolution of your portfolio. It will show you that it’s completely normal to see the overall value going down, and that your portfolio will outlive you.

While you review it each year, you will avoid bad surprises. You will remain in control and adjust accordingly. I will tell you no lie; it is incredibly boring to go through all those pages of graphics and explanation with your financial planner. It’s like watching a documentary about the history of motor engineering; it’s filled with numbers and geeky expression. Still, this is what’s going to help you sleep at night.

Still panicking?

If the financial plan isn’t enough and you still feel uncomfortable about your portfolio melting, there are a few things you can do. Getting a side job to earn a few bucks a month could help you feel financially more stable. It is only normal to feel lost when your whole life you worked and earned money. Therefore, if you can find a side gig, you will definitely feel better withdrawing from your portfolio.

You can also fix goals. For example, how about trying to live on a smaller budget than what’s written in your plan and start saving a part of your withdrawal in an “emergency account”? I’ve seen many clients starting to save a few hundred dollars per month just to keep the habit of saving alive.

In the end, I would suggest you discuss this matter with your friends. Chances are you are living the same thing as them. Money is taboo and often leaves you with a feeling of loneliness. Break the cycle and you will discover that you are not in such a bad situation after all!

Comments

[RostyC]

Thank you DC23. Many of the comments were directed to where someone will be when they retire. The article seems to be addressing an existing situation, where a retiree is seeing their existing portfolio being dipped into more than it is producing. there is probably no financial plan than can magically change that as the apparent "pot of money" is limited. Solutions are: 1. reduce your spending, 2. get a part-time job, or 3. (and most risky) take a plunge and increase your returns on the existing retirement pot. The first two may be possible, but then it may lead to a difficult life. Before I retired I was facing that. A "balanced fund" was not going to make it. Got hammered in 1987 and balanced fund growth was slow to say the least. I looked at my forecast and that was just not going to work. Six years ago I got out of my financial planner's recommended "balanced fund", and got into a self-directed account. I scrapped The "balanced fund" for a stock heavy portfolio based on stock value growth. Got hit with some downturns, but I got lucky and am closer to a breakeven with some withdrawal now, and am semi-retired. However there is no way I can revert to a less risky and more balanced approach as that will simply not work and allow the required growth. Several of my occasional financial reviewers stated "You are too heavy in stocks, especially in your top three! You have to diversify and get more into bonds, REITs", etc." I ask them to run a projections based on that approach and the returns do not allow anywhere near a comfortable retirement. Plus needing to pay for increasing health care and LTC (long term care) insurance. Sorry for the long rant, but if you are younger, please plan ahead. If you are older, and in the same boat I am in, you may simply have to be more of a risk taker, not less, if you want to reach a reasonable goal. Search wisely and grit your teeth.

[DC23]

Great topic and folks are engaged. Me included.
Unfortunately, we are the only advanced industrial economy where you will go bankrupt because of health care expenses. Only the ultra rich - the top few percent - have enough money to outlast the cost of anywhere between $5K-$10Ka month for health care. Frankly, the average is probably closer to $100K per year and if you get a serious disease - like cancer, forget about these numbers, the drugs and health care alone may be $100K per month. Along with the other living expenses, the Required Minimum Distribution, and the taxes you'll owe on that while medical expense deductions are reduced and you might as well stop worrying now.
I don't hear many of many advisors talking about how to prepare to go on Medicaid and leave something of your hard-earned gains to your heirs. LTC is being proven to be the chimera it always was as we let the health care industry blitzkrieg our economy and, frankly, our health (opioids anyone? and that is the tip of the iceberg).
Personally, I have a well planned strategy to depart this mortal coil on my own terms. Consult your Doctor on his or her final plan, not your Financial Advisor. I am ticking off my bucket list with gusto while working to making this world a little bit safer and better for all of us - which has to do with making memories with those I love and caring about my community - and I will draw down at whatever rate and be pissed off at the speculators. I still am careful and conscientious about my investing. But, I am focused on legacy and money is a very small part of that. Money is not happiness; ergo dividends are not happiness.
To quote another famous commentator: Good Night and Good Luck...and with a snub of the nose to Dylan Thomas: I shall welcome that "good night"

[QPL]

>>I don't hear many of many advisors talking about how to prepare to go on Medicaid and leave something of your hard-earned gains to your heirs.<<
---
Medicaid Planning *is a thing.* You should see an attorney specializing in Estate Planning.
Good for you for improving the World already, while you and others can have satisfactions from that already.

[Barrie Abalard]

I submit nothing in the past 40 years compares to the losses a lot of us sustained in our IRAs and 401Ks post-9/15/08 (when Lehman went down). It's the only time I've ever been truly frightened, because it was combined with job loss, a loss that was never even close to fully replaced. Having said that, if you are properly invested (not chasing the latest new hot thing, in decent dividend stocks and some fixed income instruments), you don't need to panic. You don't even need to worry as long as you are still employed, or, if retired, know how to tighten your belt for a while when needed. Corrections are opportunities if you keep cash on the sidelines.

I would add: know why you would sell or even if you would ever sell. Don't watch your portfolio obsessively. Life is more than that. If you are healthy, look for a job doing anything to replace the income and then let it go--but learn from any mistakes you make.

Good trading/investing to all, and take heart.

[Dale Roberts]

Hi Barrie, nice post. When one reaches their retirement, there should be no fear, even if they land on a severe market correction such as 2008-2009. Not if they had a sensible retiree portfolio.

Now if one was all stock or very stock heavy, sure they would likely have their #@! handed to them. They'd see their life savings get blown in half or more and I'd suggest almost all would panic. I saw this in early 2000's correction and the financial crisis.

But if one had a simple balanced portfolio with perhaps some harvested cash as well from the preceding stock run up(s) they might snooze through the last 2 recessions. Sure the balanced portfolio might include a nice dividend growth core. The portfolio might throw off some decent income as well.

There should be no reason to go back to work if one had a planned retirement. The idea is the portfolio works for you. As Mr. Buffett writes, we need to make money in our sleep.

But unfortunately, in the next major correction, many retirees will be going back to work, because their portfolios stopped working, or they sold out in fear.

Dale

[David Van Knapp]

>>"Getting a side job to earn a few bucks a month could help you feel financially more stable."<<

I relate to that. Here's how I see it. If I can make, say $5000 per year in a part-time job, that's the equivalent of having $125,000 invested and withdrawing it at 4%. Plus, the income eliminates the need to harvest anything to get the $5000, so that's an additional long-term benefit. Nothing in your portfolio has been depleted.

This kind of thinking -- in terms of income and cash flows rather than sheer wealth -- is an important part of coping psychologically in retirement, IMO. That little part-time income opportunity looks a lot more significant when viewed this way.

Dave

[Coleman Lane]

Dave,
"If I can make, say $5000 per year in a part-time job, that's the equivalent of having $125,000 invested and withdrawing it at 4%. Plus, the income eliminates the need to harvest anything to get the $5000, so that's an additional long-term benefit. Nothing in your portfolio has been depleted."

That is a great insight. Goes along with something I read from you a while back about your thinking about Social Security. Helped us a great deal in making our own plans. Thanks again for all your helpfulness.
Coleman

[Zucks]

Part of the plan should have been focusing on the types of businesses that you are investing in when you see the risk on the horizon. By selling the types of stocks that have been active primarily due to the massive infusion of printed money and putting part in cash, part in real very short term bond funds, and some in higher yielding funds That can trade on a dime, albeit panicked selling by investors will drive the prices down in the short term, I have kept my yield on my portfolio at 4% even though at this point I have about 25% cash. In the recent I picked higher yielding stocks in energy, pharmaceuticals, and finance as businesses that should weather the storm, give me the same or increasing income, and allow me not to panic because I have been posting since the summer a serious downturn is guaranteed to come because liquidity will be shrinking, and after the fall, it will be a great time to invest in good REITs etc again. PS Always remember the real return on an investment. It is your yield minus the two year rate on treasuries to account for inflation. This is why you may be seeing seniors going back to bonds but that’s another story.

[aarc]

These are the ways i avoided portfolio obsession:

- I bought 130 stocks and ETFs in Feb/March 2009 as core.

Too many almost impossible to manage 130 stocks and ETFs. So i just delegated them into the Fire-and-Forget dustbin for years on ends.

>> Big Kahuna Picture: http://bit.ly/1LLVgFr

65% of account initially allocated to retirement portfolio with 15 to 25 years hold and conservative 970% profit objective based on 1942 to 1965 secular rally as least common denominator. Slowly beefed up to 100% by February 2016.

>> Account Management: http://bit.ly/2DdKvMq

Portfolio collapsed -40% in 2011 and -30% recently in 2016. I almost panicked during the EU debt crisis but Buffett suddenly bought zombie BAC and other companies, it prevented me from selling my core portfolio. Each time Buffett went crazy buying stocks and whole companies on downturns; i got carried away and leveraged my account in 2010 PIIGS crisis, 2011 EU debt crisis, 2012 fiscal cliff crisis, and 2015/16 global bear markets galore.

,

Portfolio performed 618% vs. 408% max gain by SnP500. Mainly due to overweight in volatile financials that rallied 535%; about 3 dozens of zombies some performed more than 5,000%; and the additional 2x and 3x ETFs that rallied hundreds% to thousands% over the years.

>> 1940s to 70s: http://bit.ly/2CbRUjm

- Longest Bull Run = 13 years from 1949 to 1965.
- 355% price appreciation, 683% including DRIP;
- CAGR = 18.02%.

- Current Bull Run = 9 years from March 3, 2009 bottom;
- with 257% gains to Jan2018 ATH, 346% including DRIP;
- CAGR = 18.45%.

But i've got to slow down as this 9 years old bull run of Dow Jones might already be long on the tooth. No way of knowing when the next cyclical correction of say -25% and -27% lasting about 3 years would happen again.

>> Strategic Plan A: http://bit.ly/2FMvGn8
>> Fiscal Stimulus Plan B: http://bit.ly/2yjQP3V

If markets keep rallying; then more than 970% profits can be realized as another 100% rally is possible in the next 2 to 4 years. 618% * 2 = 1,236% = retire luxuriously. Otherwise, not a big problem if my initial 15 to 25 years investment horizon becomes a reality.

No need to lose your head, have a Comprehensive Plan.

Good luck.

[mortenefriis]

Great perspective.. obvious when you read it, but nothing I had considered as Im still 10 years from retirement..thanks!

[Roger field]

Good insights into a problem time of life.

[Dale Roberts]

That's why retirees don't retire with all stock or nearly all stock portfolios. Some ballast is required, if one actually needs the funds or has a modest or low risk tolerance level.

Building a portfolio to weather the storms was easy. Here's my article How Retirees Made It Through the Last Two Recession. Examples by way of Vanguard's simple managed portfolios. But it's about the asset allocation at work, not any active management.

https://seekingalpha.c...

Dale

[Dale Roberts]

Of course bonds used to pay a little something. Their contribution on that front is certainly challenged. Retirees might have to adjust/lower expectations, but I would hope one could still manage a 4-4.5% spend rate inflation adjusted.

Selling shares is not a problem but a benefit if one embraces some modest share harvesting. It allows for better risk management and better spend rates.

The" living off of the dividends" is likely a terrible trap when we enter a severe recession or severe market correction that combines portfolio value erosion and dividend holds and cuts. We'll see so many who were investing well outside of their risk tolerance level.

Many on Seeking Alpha espouse that path to retirement destruction, unfortunately.

Hope that wasn't too harsh, ha.

Dale

[kovnat]

Sometimes the blow of financially disastrous scenarios including a possible need for Long Term Care (a potentially very expensive situation), and natural disasters such as storms like Katrina can be softened by insurance. However, insurance companies are in business to make money. Not to be a charity for all needs of the likes of us. My approach to combat most of the sales pitches by insurance agents has been to be self-insured. I have tried to "go lightly" in terms of the lowest likelihood disasters and to be "self-insured" as much as possible. Instead of writing the monthly check to pay for the premiums, I have written myself a check for a monthly investment in my portfolio.

Over the 40 years of doing this, the sulf-insurance fund has been built into a fortress against almost any financial disaster, including dividend holds and cuts. This fund is now providing me with my "retirement salary" including raises (dividend growth) that keep me one step ahead of inflation. It also provides a warm bubbly feeling instead of the angst and fear that comes with portfolio disintegration. These negative emotions have a way of wearing down the mental enjoyment of life as well as our physical health.

Obviously, this requires some good genes mixed with a healthy lifestyle, hard work, much studying and more than a modicum of luck.

Wishing all much success in being able to enjoy retirement.

Dan

[rfied112]

There is a philosophy that social security is your bond allocation allowing heavier equity percentage.....i also have 10% allocated to preferred stocks which i treat as 70% bond in terms of allocation

[wildpitcher]

Good article.

One thing I never see discussed in this context is the effect of Long Term Care on retirement plans. The insurance market for LTC is broken and dysfunctional, and many of us are uninsurable due to preexisting conditions.

As a result, I invest my portfolio for growth and plan to try to self insure for LTC to the extent i can.

My situation is that I'm retired for 3 years, married and 63. By the way, we rent by choice and invest the money we would have tied up in home equity. While our apartment is a bit small, it is in a very good location and quite nice.

Dave

[CapeHornInvesting]

wildpitcher,

Excellent comment. Your last paragraph is exactly what I did. I used to be proud of my skills installing water heaters, fixing sprinklers, etc. But I really love being free of all that, and living within walking distance of everything--it gives me a reason to walk, possibly pushing that LTC stuff out a bit further so I can afford it when needed.

[QPL]

>> By the way, we rent by choice and invest the money we would have tied up in home equity. While our apartment is a bit small, it is in a very good location and quite nice. <<
---
In case you should ever have the need, be acquainted with your rights to reasonable modifications and accommodations under the Fair Housing Act. These things may make the difference of (continuing) independent living, besides possibly shorter hospital stays.

http://bit.ly/2G9VaL7

http://bit.ly/2DdSdGt

[CapeHornInvesting]

I love it when people provide actually helpful information!

[BeatingTheJoneses]

One thing not mentioned that I find helpful is to show the line graph of the market performance during the biggest crashes and then show the performance looking at 50-70 years. You can barely notice these big crashes.

[ErpichtAuf]

"The moment you stop making money, you stop saving. Then, you are forced to withdraw from your portfolio. This is the point of no return. Each month, your portfolio drops a little. It’s like there was a small hole in your wine bottle and you don’t get to drink it all, as the wine is leaking slowly on the other side. You feel helpless because there is no way you can put money back in. You have worked very hard your whole life, only to see your greatest financial achievement reaching sunset as you grow older."

It is possible for your portfolio to continue to grow even as you withdraw from it. It is a matter of living within the budget it provides. If you're unable to live within that budget, your portfolio possibly needs to be further developed or you perhaps should reduce your expenses.

[Flames74]

You are wrong especially about loosing money on yours all stardividend stocks which are supposed to be more safe and come end of year your portfolio has dropped sharply much that when it comes to withdrawing the required rate each month per govt rules you don't have enough money to live on re bills, no trips and no good advice given to you how you can make your account safer and grow each year. Am in late 70s and widowed living under poverty level. This is from anomoyous only no name or email is to be shown.

[fripp1]

Has the Russian disinformation campaign shown up on SA now? Or is this only the latest installment?

We've certainly seen the results of its previous activity among the readership well before this.

[CapeHornInvesting]

People in your situation need to make certain they are taking advantage of any government benefits available, and also pay close attention to your tax situation.

I know too many seniors that have paid taxes all their lives and then are too proud to take the benefits. Or don't know where to start to find them.

The place to start is http://www.aarp.org.

I copied this off of their webpage:

Benefits QuickLink
Need help paying for food, utilities or medicine? You could be eligible for 15 government programs that help people stretch their money and cover everyday costs. Benefits QuickLINK can help you find out! Answer the survey questions and get the program applications and information you need to apply for programs where you live.

Hope this helps!

[JTLawlor]

aaahhh Flames - Makes me recall some of the best women in my life! Like you I am in my mid-70s and doN't like being 'required to take IRA distributions' by our govt. - but (with relatively low-no Earned income) - I am comfortable allocating those withdrawals to Taxable investments, chosen with a Plan, and patiently. This helps the overall state of my portfolio with some growth and I sleep better. All-the-Best !! jtl

[dividend1220]

"You will fear that your portfolio drops too fast. You will fear that you won’t have enough. You will fear being forced to sell your house. You will fear living in a small apartment and dying poor after you worked so hard for that retirement." OMG, you read my mind.....

[kovnat]

dividend1220,

Who was it that said, "We have nothing to fear except fear itself." Apply that here. Develop a retirement plan and include in that plan the What To Do for that period of disintegrating portfolio.

Having experienced two intense periods of disintegration in the post-dotcom bubble burst and the Great Recession banking crisis, I can reassure all that strength begats endurance. Your strong companies (MMM, MCD, KO, BA, and other champions and aristocrats) will long outlive you, as long as you don't sell them.

Plan for the Correction (Disintegration, if you want to call it that) by holding dry powder to enable you to gobble up some valuable stocks as they become undervalued.

As is said in the SCUBA courses, "Plan your dive and dive your plan."

Dan

[CapeHornInvesting]

I have a different take. I think if you are that afraid, you might have good reason to be. It might be a wake-up call about your overall plan.

My father retired at 65 and passed away 1 month later. It can happen to anyone.

I am faced with the same possibility.

I highly recommend that retired folks get out and do something. Volunteer, take a part time job, join a club, make new friends. Find a way to make a little money on the side that is FUN.

I retired at 56 because of my dad's experience. I took a part-time job (every other weekend) at a local outdoor recreation business. I did it to meet people and because I was experiencing a little pang of this fear.
And it was a fun job. Now I run the place as general manager. OK I basically un-retired myself unexpectedly. I wasn't forced to, I could have continued indefinitely part-time, but I enjoyed the work so much, I couldn't turn down the offer when it came along. If I die at 65, OK, this last decade has been fabulous (and may have extended my life).

I no longer think about how much money I will need for retirement, though I continue to invest. Instead I focus on how I really want to use these precious few years I have left.

[fripp1]

"Who was it that said, "We have nothing to fear except fear itself"[?]"

That was an acceptable paraphrase. Democratic president Franklin Delano Roosevelt. The actual quote is "The only thing we have to fear is fear itself." It was part of his inauguration speech in 1932 and alluded to the struggles the country faced in the wake of the global depression set off by the market collapse in 1929.

[Moon Kil Woong]

Sadly people live in fear working like a dog trying to have enough money and then if they retire they live in fear trying not to spend so they don't lose it all and if they succeed then they struggle to keep enough for others so their passing will be remembered. It is sad and depressing. Don't let this consume you but try to save and invest wisely. And last but not least don't invest like your gambling and don't consider all your gains as money you don't expect to ever lose. Be aware at any time for whatever reason your investments can depreciate a good 25-30%. That doesn't mean if they do sell. In fact, it usually is all the more reason to hold onto them.

[Ron 2023]

FEAR is NOT a strategy.

There are a number of (more?) conservative investments to choose from. ALSO: One should consider keeping 1 to 3 years of money in cash to avoid having to panic-sell. ANY MONEY that is needed within the next 3 years needs to be held in cash.

If that/those rules are followed, you should be able to weather any downturn. JMHO!

[scottygdog]

1 to 3 years? The average family can't even afford 1 to 3 months, which is what I'm trying to do now.

[Robert Allan Schwartz]

"The average family" doesn't read Seeking Alpha.

[Dale Roberts]

Nothing happened, it was a love tap. Preparing a portfolio for retirement is not that difficult. No one should have been scared of that little correction.

Dale

[Beattheindex]

I sometimes wonder if it’s just better to systematically and periodically invest in an index ETF for retirement and sleep well at night. S&P index has outperformed most active managers. So wonder why not just sit back and invest in an index fund. I love investing, and that’s why I trade once in a while. If one who does not share that passion why not just invest in an index fund and relax...

[BeatingTheJoneses]

It is better. The added benefit of it is that you have a large amount of history backing your portfolio so you’re confident it will recover. Any type of stock picking doesn’t give this comfort which will cause underperformance for most because they will sell at the wrong time. Don’t get me wrong though the extra % you’re able to achieve by stock picking is worth the risk but only those who are disciplined and passionate about it should do it which is probably 1% of the population. Then of that 1%, 75% will underperform.

[CapeHornInvesting]

Absolutely nothing wrong with this idea, Prat123.

[NecessityMadeMeDividendInvestor]

Wooow, awesome article. Thank you. Im not retire yet, so I guess this is still front of me as I still supply my ptf from montly income, so it is growing... and I still have a lot of size to grow to dividends supply my montly needs... but! I still have about 20 years to go and that keep me sleep at night... even now when Im quite under my original invested money after Feb price downgrades, its opportunity to buy more for less money for me... as I do not plan withdrawal amy money from stocks...