Ask The Rational Investor: Chinese trade war impact on your retirement

Due to Chinese trade war rhetoric, the stock market has been whipsawing investors, causing retired and soon-to-be retired investors to wonder if they should reduce their equity allocation.

First off, it is challenging to estimate the long-term economic impact of any news event. On the China issue, Goldman Sachs recently published an analysis that suggests the trade war will impact U.S. economic growth by 0.70% from the second-half of 2019 through the first-half of 2020.

During times like these, emotion and fear can lead to mistakes, resulting in disappointing retirement outcomes. It is clear that the trade war impact will lead to these mistakes.

In fact, a study completed by Dalbar Inc. found that over the last twenty years (ending in 2015) the S&P 500 Index earned an average return of 9.85%, but the average return earned by investors was only 5.19%.

Why the difference? Emotions and market timing.

In their research, they found that investors consistently bought and sold at the wrong time. Looking back, they needed to have conviction in their long-term retirement plan and to have been educated about their portfolio holdings.

How do you know if changing your asset allocation is prudent?

While the slowdown in economic growth might not seem like much, we can’t ignore the fear and geopolitical uncertainty in today’s world. With that being said, we should also focus on facts. Not emotions. A bright point might be that 58% of S&P 500 companies reported earnings surprises in the latest quarter!

Counseling client’s on the appropriate mixture between cash, fixed-income, and equities starts with understanding the client’s lifestyle spending in retirement. In our experience, a successful retirement, as defined by our clients, is usually one where their spending can gradually increase along with inflation (or 2-3% per year). The Chinese trade war does not have to impact your retirement.

A few good ‘rules of thumb’ to keep-in-mind:

1. Your cash and fixed-income allocation should be a multiple of several years of expenses.
2. Take your lifestyle spending and subtract social security and other sources of income. Divide your adjusted spending by your investable assets. Spending rates above 5-6% of your portfolio per year should be reviewed by your professionals.

Sources: Dalbar, Inc., Goldman Sachs

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.