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Market Volatility: What If You Don’t Have Time to Recover?

Key Points
  • Market volatility can be especially unnerving for investors with short investment time frames, including those in or near retirement.

  • Money that you expect to need within the next four years should be in lower-risk, more-liquid investments.

  • Retirees’ portfolios should include a mix of investments to support spending in the short, intermediate and longer term.

It's one thing to stick to a long-term investment strategy in a good market—or in a down market, if you have time to recover. But what if you don't?  What if your time horizon is short or you have a goal with a series of time frames, like a multi-year retirement?

If you're investing for a long-term goal, a combination of time in the market, consistent contributions and a long-term strategy works. However, if you’re investing for a short time frame, short-term volatility is your enemy. As economist John Maynard Keynes famously said, "Markets can remain irrational longer than you can remain solvent." Don't fall into this trap when creating your investment strategy.

What is a "short" time horizon?

For the average investor, a short time horizon doesn't mean a day or a week. A short time horizon, more realistically, is four years or less. If you expect to need the money within that time frame, you shouldn't be invested aggressively, unless you can afford to lose money and still meet your goals. That's the nature of investing.

Why four years? Since the 1960s, the average time from the peak in an up market to the trough in a down market and back up again has been around three and a half years. Future downturns could be longer or shorter, but a four-year time horizon is a cushion that can help manage risk in most markets.

Average time to recovery for the S&P 500® Index

Average time to recovery for the S&P 500® Index
Average time to recovery for the S&P 500® Index

Source: Schwab Center for Financial Research with data provided by Bloomberg. Chart reflects periods in which the S&P 500 Index fell 20% or more over a period of at least three months. Time to recovery is the length of time it took the S&P 500 to complete its peak-to-trough decline and then rise to its prior peak. Past performance does not guarantee future results.

What model portfolios align with each time horizon?

Your portfolio should be consistent with your time horizon. We often talk about having a long-term strategic asset allocation, but that generally makes sense only if you have a long-term investment objective. If you don't, you should build your asset allocation based on the date you expect to need the money.

The table below shows Schwab model portfolios based on time and risk tolerance. When your time horizon is four years or more, it has made sense, historically, to take greater investment risk. On the other hand, if you have a shorter time horizon, a portfolio weighted toward more-stable assets—such as cash investments, certificates of deposit or U.S. Treasury bills—is usually a good idea.

Assign a target asset allocation to your portfolio

Assign a target asset allocation to your portfolio

Source: Schwab target asset allocations, non-custom, were developed by the Schwab Center for Financial Research. The historic returns for asset allocation plans are weighted averages of the performances of the indices used to represent each asset class, include the reinvestment of dividends and interest, and are rebalanced annually. Expected returns show Charles Schwab Investment Advisory’s  2015 20-year capital market and return expectations, based on current interest rates and other factors. These capital market expectations are used in Schwab financial planning tools and are below average annual returns historically. For more information see Schwab’s long-term capital return expectations on Please see below for indices used.1

For help with your asset allocation, start by filling out Schwab's Investor Profile Questionnaire for each of your investment accounts and goals. This can help you decide whether one of the model portfolios is right for you.

Which model makes sense for which goals?

Most investors have multiple investment goals. Those financial goals translate into investment plans, which turn into portfolios. If you don’t have a clear list of your goals, start there.

Choose an allocation appropriate for your goal

Choose an allocation appropriate for your goal

Source: Schwab Center for Financial Research. For asset classes by allocation, see the tables above.

What if you're approaching retirement or already there?

Thirty years ago, the financial services industry focused mostly on saving and investing for growth. That made sense, as most Americans new to investing were younger and in their prime wealth-accumulation years. Today, retirement is an approaching reality for millions of Baby Boomers.

Portfolios for investors near or in retirement are unique. They have not one, but several time horizons: now (money you'll need in the next year), soon (money you'll need during the next two to four years) and later (money you'll need more than four years from now, for a long, but indefinite, period of time).

Portfolios for people near or in retirement should include a mix of investments to fund spending now, soon and later. Beyond simply being diversified, these portfolios should contain an appropriate combination of higher- and lower-risk investments.

The chart below shows Schwab's model portfolios for retirement, for those who plan to spend from their portfolios. Remember, you're not going to spend it all at once, but over a period that could last 30 years. You should target an allocation that combines low-risk investments for the shorter term and investments with higher return potential for the longer term. Ideally, the lower volatility potential in these portfolios can reduce the risk of your not having money from investments when you need it.

Allocation for your time horizon in retirement

Allocation for your time horizon in retirement

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. See the chart above for index details.

When we think of risk when investing, short-term volatility is typically the risk we mean. When we think of risk in retirement, a better definition is: not having enough money when you need it. In building a retirement portfolio, you should target the appropriate amount of risk in different buckets to meet your "now," "soon" and "later" needs.

How can I review my portfolios and goals in volatile markets?

  1. Start with a list: What are your goals? Assign each a priority and time horizon.
  2. Next, develop a diversified allocation for each. Use the Investment Profile Questionnaire to help guide your choices. The questionnaire is particularly useful in a down market, as we tend to answer questions like "how much risk can you take" differently in bull and bear markets. Beware "recency bias," however. Investors tend to answer questions differently when thinking about short-term performance—don’t do this when creating a long-term plan.
  3. Write down your allocation, based on time horizon, and stick to it until your personal circumstances change.

How can I decide if my allocation is on track for retirement?

Remember, you have multiple time horizons. Few investors cash out their entire retirement portfolio all at once. In a retirement portfolio, you want to create the right mix of investments with low return/low risk combined with higher potential return/higher risk to meet your "now" (less than one year), "soon" (two to four years) and "later" (four years or more) needs.

The best way to do this is to start with a budget. Do you know how much money you may need this year? During the next two to four years? If you know this, it makes investing for four years and longer easier. The portfolios above  are a place to start, based on generally sustainable spending rates—also shown in the table—depending on your stage in retirement.

How do I invest for income?

Don't fall into the trap of investing solely for income in retirement. This leaves you vulnerable on two fronts: you may lose money if you're forced to sell investments during a down market to fund "now" spending, and you may miss out on potential growth that could help fund your "later" spending. With a balanced portfolio, you will likely be in a better position to benefit from both income and growth opportunities. Also, a narrow focus on income can lead to a greater concentration in certain investments or sectors than most investors should take.

Should I change my allocation in response to changing market conditions?

It's important to start with a preselected target allocation for each goal. Then you can use changing market views for guidance as you "shade" the allocation of investments in your portfolio, rather than going all or nothing into one investment or other.

What can I do now?

After reviewing each of the points above, you may want to talk with a Schwab Financial Consultant for advice that takes into account your specific circumstances and goals. This should help you feel more comfortable investing in both good and bad markets, no matter what your time horizon may be.

Talk to Us

  • Call Schwab anytime at 877-338-0192.
  • Talk to a Schwab Financial Consultant at your local branch.
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Important Disclosures


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