Welcome back to another round of Sound Retirement Radio you are listenting to episode 450 the title is Margins of Safety. When markets get wobbly, people panic. It’s natural. We’ve all seen it—headlines screaming recession, market crashes, and doomsday predictions. The fear can be overwhelming. But what if I told you that you could structure your retirement investments in a way that makes all of this noise irrelevant? That’s what today’s episode is about—building Margins of Safety so you can worry less and live more.
Articles, Links & Resources:
Forbes – Presidents and the Federal Workforce
How the stock market performs during times of war
Biden’s extension and expansion of Trump’s Taiffs
Trump isn’t the first president to slash the federal workforce
Investing In Retirement – New eBook by Jason Parker
Transcript:
450 Margins Of Safety
Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now, here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
You’re listening to episode number 450, and the title is Margins of Safety. When markets get wobbly, people panic and it’s natural. We’ve all seen the headlines, screaming recession, market crashes, and doomsday predictions. The fear can be overwhelming, but what if I told you that you could structure your retirement investments in a way that makes all of this noise irrelevant?
That’s what today’s episode is all about, building margins of safety so that you can worry less and live more. But before we get into today’s show, let’s start the day right by renewing our mind. I’ve got a verse here from 2 Timothy 1, verse 7. For the spirit God gave us does not make us timid, but gives us power, love, and self discipline.
And here’s something fun for the grandkids. What’s worse than finding a worm in your apple? Finding half a worm.
Remember transcripts of today’s show, as well as article links and resources mentioned can be found at soundretirementplanning. com. Just click on episode number 450. There’s an old saying, a rising tide lifts all boats, but when the tide goes out, you find out who’s been swimming naked. And it’s easy to feel like an investing genius when the market is climbing.
But when things turn south, your financial plan and your investment strategy get put to the test. If you find yourself making changes to your portfolio based on politics, market volatility, or economic concerns, or the latest prophecies from one of the bad news profits of doom, it could be a sign that your original strategy wasn’t built to last.
The biggest warning sign that you might lose money investing over the long term is if you’re constantly changing strategies when things get a little bit bumpy. Market timers often pay more in taxes and experience lower returns because they fall into the classic trap of buying high and selling low, chasing euphoria and fleeing in fear.
They treat investing like it’s a game, or worse, like gambling. But successful market timing requires predicting both when to get out and when to get back in. And missing just a handful of key days can drastically reduce long term returns. Ironically, I’m kind of grateful for the market timers and their emotional reactions.
They create the buying opportunities for those of us who stay focused on long term fundamentals rather than daily headlines. This is why having a well structured retirement plan and a disciplined investment strategy is critical. The key to success isn’t reacting to market noise. But staying committed to a plan you can follow through any market cycle.
In addressing current investment concerns, I think it’s important to consider historical context and the data. Let’s dive into three specific areas. Tariffs, geopolitical conflicts, and the federal workforce size, starting with number one tariffs. During President Trump’s first term from January 2017 through January of 2021, he implemented tariffs against China, the European Union, Canada, and Mexico.
The S& P 500 index experienced compounded annual growth rate of approximately 16%. President Biden maintained those tariffs during his term, and in some instances, increased tariffs against China, and the S& P 500 experienced a compounded annual growth rate of approximately 14%. While both periods saw substantial market gains, attributing those solely to tariff policies would be an oversimplification, as markets are influenced by a multitude of factors.
But to simply state that tariffs will cause the market to fall was not the case during the last eight years. Number two, geopolitical events. During President Trump’s first term, there were no new major military conflicts involving the U. S., though the country remained engaged in ongoing operations in Afghanistan and Iraq.
Historically, markets have shown resilience, even during wartime. For instance, during World War II, the Dow Jones was up more than 50%, averaging 7 percent per year. And during the Vietnam War, the U. S. stock market continued to perform well with an overall performance of 43 percent or 5 percent per year. So this suggests that while geopolitical events can cause short term volatility, they don’t necessarily impede long term market growth.
So putting too much focus on Russia and Ukraine might cause you to miss out on the benefits of being a long term investor. Number three is the size of the federal workforce. The size of the federal workforce has, has fluctuated under different administrations, but its relationship to stock market performance is not straightforward.
According to a Forbes article, there are some notable trends. During Ronald Reagan’s presidency, the federal workforce grew 000 employees. At the same time, the stock market as measured by the S& P 500 experienced really strong growth. Then, under Bill Clinton, um, he reduced the size of the federal workforce by approximately 339, 000 jobs, coinciding with a period of exceptional stock market performance.
And then George W. Bush increased the federal workforce by about 33, 000 employees, yet the S& P 500 declined over the course of his presidency. So looking at these numbers, there’s no clear pattern linking the size of the federal workforce to stock market performance. Reagan expanded the workforce, and the market thrived.
Clinton reduced it, and the market soared. Bush increased it, and the market struggled. And so, this really underscores an important point. Attempting to predict stock market movements based on a single factor, such as changes in the federal workforce, it’s just not a reliable strategy. The market is driven by a complex mix of variables.
Kind of like baking chocolate chip cookies. Once you combine the ingredients, flour, eggs, and sugar, you can’t separate them back out in the same way. Economic growth, interest rates, corporate earnings, inflation, and investor sentiment all play a role in market performance. For investors, the key takeaway is to focus on long term, fundamentals based investing rather than reacting to short term headlines.
Investing is about owning businesses that produce goods and services that make our lives better, and I don’t see that trend changing anytime soon. Volatility is inevitable. But in retirement, structuring your portfolio wisely ensures you don’t have to worry about short term fluctuations. Despite what some of the YouTube survivalists might suggest while selling their MREs in fear, we’re not heading back into a bartering economy.
The real risk isn’t market cycles. It’s letting short term panic drive long term decisions. So let’s talk about the margin of safety and things that you can do to deal with the uncertainty of the day. The concept of margin of safety was really made famous by Benjamin Graham, Warren Buffett’s mentor. In stock investing, it means buying at a low enough price that even if things go wrong, you’re still protected.
But this idea isn’t just for stock selection. It applies to retirement planning too. In engineering, think of a bridge that’s rated for 10, 000 pounds. It might actually be built to handle 15, 000 or 20, 000 pounds. They call this extra capacity, a factor of safety, and it protects against unexpected stress in a similar way.
In retirement, having a margin of safety means preparing for risks without panicking about every market hiccup. One of the biggest risks retirees face is a bad sequence of returns, starting retirement with a stock market downturn. If you’re withdrawing from your portfolio while it’s declining, your assets might not recover fast enough, increasing the risk of running out of money in retirement.
So how do you protect against this? One way is to diversify your money based on when you need it. And there are three primary asset classes people use when they think about investing in retirement. Those are cash, bonds and stocks. Cash equals spending and security. It provides liquidity for short term expenses and reduces the need to sell investments during a downturn.
Bonds They act as a buffer against stock volatility, and they provide steady returns to support cash flow. And then stocks equal growth and inflation protection. They’re a long term growth driver, and they help maintain purchasing power over time and fight back the ravages of inflation. Warren Buffett recently reported that Berkshire Hathaway holds 325 billion in cash and high quality Treasury bills.
Given Berkshire Hathaway’s 1. 1 trillion market cap and the fact that the rest of its assets are invested in businesses, we could describe Buffett’s portfolio as roughly 70 percent stocks and 30 percent cash. As you evaluate your own asset allocation, what’s your mix between stocks, bonds, and cash? When we help clients create retirement plans and investment strategies, we rarely see 100 percent stock portfolios.
Just like Buffett, we believe in owning cash and high quality bonds and we avoid high yield junk bonds. And we’ve had some outside consultants over the years review our investment strategies, and in some instances, they have suggested incorporating junk bonds into our allocation models. But we specialize in working with retirees.
And so for our clients, bonds serve as a stabilizing force, reducing volatility. rather than chasing slightly higher returns at the cost of increased risk. So, in those instances, we’ve rejected their recommendations. But this is a key distinction between firms focused on retirees and those working with younger investors who can afford greater risk in pursuit of higher returns.
A few years ago, low interest rates made bonds less attractive. But the interest rate landscape has changed. Today, high quality bonds offer compelling yields. And remain a valuable diversification tool. In finance, there’s a concept called equity risk premium. It’s the additional return investors expect for taking on stock market risk instead of staying in a risk free asset.
Investors take risk because they believe that they’ll be compensated for it over time. If the reward for risk isn’t sufficient, They would simply keep their money in a safe, risk free investment. The equity risk premium represents the extra return investors expect for holding stocks instead of risk free assets like short term U.
S. treasuries. For example, if stocks are expected to return 10 percent annually over the long run, and cash yields 4%, the equity risk premium is 6%. A 60 percent stock, 40 percent bond portfolio historically returns around 6 to 8%, but it carries risk. Market downturns can reduce a 60 40 portfolio by 15 to 20 percent in the next six months and potentially more in a deep bear markets.
That’s why your retirement investment horizon matters. If you need the money in the next year or two, accepting the save for short term return might make more sense. Many retirees feel anxious because they hold a 60 40 mix without aligning their short term spending with a cash buffer. A structured plan helps weather volatility by ensuring cash is available when needed, allowing the rest of the portfolio to recover.
If cash is paying 4 percent risk free in something like a high yield savings account, and a 60 40 stock bond portfolio is expected to earn 7 percent over time, is taking extra risk for a 3 percent excess return worth it? In the short run, maybe not, but over 30 years, the power of compounding makes a significant difference.
The key is structuring your portfolio to align with your actual cashflow needs rather than relying on a generic risk questionnaire and some model portfolio that you got plugged into. So, some other ways that you can build a margin of safety, number one is strategic social security timing. Delaying Social Security can increase your guaranteed income and reduce long term portfolio withdrawals, creating another margin of safety.
Social Security is tax efficient income, inflation adjusted, and there are spousal benefits and survivor benefits. In the Retirement Budget Calculator, we have a brand new Social Security Calculator with a Maximize button. And this calculator looks at over 9, 000 different claiming strategies for married couples and shows you.
Based on your specific plan, which strategy helps you get the most social security over two people’s lifetimes? And this is a brand new feature and it takes into consideration spousal benefits, survivor benefits, inflation, and life expectancy. It’s really powerful and it’s so much better than many of the simple social security calculators that are only looking at social security in isolation without the context of your entire plan.
Number two is global diversification. International and emerging markets don’t always move in sync with U. S. markets. Diversifying globally can help stabilize returns. And I see a lot of people who only own S& P 500 index for stocks. And it’s times like these that they can see why that exposes them to more risk.
In episode number 443, I explain why global diversification matters and how much less expensive international stocks were compared to U. S. stocks in the case for having a more broadly diversified portfolio. If you’ve not yet listened to that episode, I recommend that you make it the next one you listen to.
Number three, keeping your costs low. Many investors don’t realize how much they’re paying in fees. Reducing investment costs creates an additional margin of safety by allowing you to keep more of your returns. But most people have no idea what they’re paying. And this is one reason why we’re fans of using low cost, exchange traded funds for creating the asset allocation strategies for our clients.
ETFs tend to have lower fees, more liquidity, and they’re designed in a way to be more tax efficient and to help us achieve deep diversification across asset classes, sectors, and across the entire globe. Number four, cash reserves for early retirement. Holding a few years worth of withdrawals in cash at retirement’s onset can prevent you from selling investments at a loss during downturns.
Number five, rebalancing your portfolio forces you to buy low and sell high automatically. Exactly the opposite of what most nervous investors do. Remember Warren Buffett said, you want to buy when there’s blood in the streets. When everyone else is scared, it creates the opportunity that we’re looking for to buy shares at a better price.
But the hard part is buying when everyone is selling. Rebalancing is a forcing mechanism to help us do the opposite of what our brain tells us that we want to do. It forces us to sell some of the good stuff and buy the bad stuff. Because ultimately, no one asset class dominates forever. Eventually, there’s a reversion to the mean.
And rebalancing helps us to buy low and sell high. Bear markets are a reality of investing. And one of the biggest concerns retirees have is how long will a bear market last? Historically, the average bear market has lasted about 9. 6 months, but the dot com bust lasted two and a half years. The average bull market lasts about 2.
6 years. And on average, it takes about three and a half years for the stock market to fully recover losses after a bear market. However, recent recovery times have varied widely, ranging from as little as five months to seven years, depending on the severity of the downturn and economic conditions.
Markets have historically recovered. Having a strategy in place that puts time on your side, helps make sure that you don’t get shaken out at the worst time. Here’s some final thoughts. Building margins of safety into your retirement plan means preparing for the unexpected without letting fear dictate your decisions.
Number one, you want to stay diversified across asset classes, sectors, and across the entire globe. Number two, you want to create buckets to diversify your time strategy based on when you need to spend the money. Number three, keep your costs low. Number four, build cash reserves. Number five, be strategic with when you start Social Security.
Number six, follow a sustainable withdrawal strategy. And number seven, create a retirement cash flow plan before creating an investment strategy. And most importantly, stick to the plan. In the good times, you will be tempted to sell the stuff that’s not doing well, to chase the positions that are doing the best.
And in the bad times, you might want to sell and sit on the sidelines and wait it out. But both are mistakes. Remember, it’s not about making the right decision every time. It’s about making sure you survive the wrong ones. That’s a quote by Jeff Bezos, but it applies perfectly to investing during retirement.
If you’re unsure whether your portfolio has enough of a margin of safety, now is the time to get a second opinion. And our team is happy to help you review your retirement plan and review your investment strategy to help you see If you’re positioned to weather whatever the market throws your way. If you want to learn more about our philosophy and specific investment strategy before scheduling a meeting, I have a new ebook available, which you can download from the retirement budget calculator in the upper right corner, you’ll see an invest button.
Click that button and you can either schedule your complimentary meeting or download my new ebook. So that’s it for today’s episode number 450 margins of safety. If you found this helpful, please subscribe, leave a review and share it with someone who could benefit. As always, you can check out our retirement budget calculator to start planning your retirement with more confidence.
Here’s a snippet of an email I received from Todd recently. He said, I’ve been a fan of Sound Retirement Planning Podcast for some time, and I was an early subscriber to the Retirement Budget Calculator, and it’s fantastic. I was able to retire from my career at 56, about five years ago, and the Retirement Budget Calculator was certainly helpful to feel good about that.
And I still use it to check how I’m tracking. I looked at a number of retirement calculators on many financial sites. And RBC is the best I found. Thanks, Todd. Here’s another email I received this week from Shane regarding the new Social Security Calculator that we just released in the Retirement Budget Calculator.
He says, Great job on the new Social Security Calculator. Very informative and easy to use. I think you all knocked it out of the park. Thanks, Shane.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links, and resources from today’s show, visit sound retirement planning.com. If you enjoy the podcast, share it with a friend and give us a five star review.
Ready to kickstart your retirement planning head over to retirement budget calculator.com. Need assistance with investment management. Explore our services at parker financial. net. Information and opinions expressed here are believed to be accurate and complete. For general information only, it should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive Northwest, Suite 201, Silverdale, Washington. For additional information, call 360 337 2701 or visit us online at soundretirementplanning. com.
