Sam Sivarajan is a speaker, independent wealth management consultant and author of three books on investing and decision-making.
In today’s ever-changing financial landscape, one thing is certain: the importance of planning and of adapting. As investors, we’re all familiar with the concept of having a solid plan in place. We set our goals, allocate our resources, and chart our course toward financial success. But what happens when life throws us a curveball? When the market takes an unexpected turn, a global crisis shakes our confidence, or we have personal upheaval?
It’s at these moments that we’re reminded of Mike Tyson’s famous words: “Everybody has a plan until they get punched in the mouth.” Sure, we can have the best-laid plans, but when the unexpected happens, we need to be ready to adapt. Just like in the world of emergency responders, where split-second decisions can mean the difference between life and death, investors must be prepared to pivot when circumstances demand it.
Consider the Great Recession of 2008 or the COVID-19 crash of 2020. These events blindsided even the most seasoned investors, highlighting the need for flexibility and resilience. Instead of sticking rigidly to our original plans, we had to adjust our strategies, reallocate our resources and weather the storm until calmer waters prevailed.
But adaptation isn’t just about reacting to crises; it’s also about seizing opportunities. Take the surge in interest rates over the past few years. Investors who were ready to adapt and increase their allocation to fixed income will likely reap the rewards, while those who remain rigidly stuck in their plans may miss out on significant gains, particularly if rate cuts are on the horizon.
So, how can investors cultivate adaptability in their approach? It starts with embracing uncertainty and recognizing that the future is inherently unpredictable. Instead of clinging to rigid plans, we must remain open to new possibilities and willing to adjust our tactics as circumstances evolve. Keep focused on our goals but remain flexible in our approach.
For instance, those retiring with an expectation of drawing a certain sum every year from their portfolio may be in for a rude shock if the market is in freefall at the start of their retirement. Let’s consider two different cases.
In both cases, “Mary” retires at age 65 with a $1-million portfolio and wants to draw $75,000 toward her annual expenses. For simplicity, we look at a 15-year period, with no taxes, fees and so on. In both cases, the market has a stretch of three bad years with minus-15 per cent returns a year and the remaining 12 years have good returns of 10 per cent a year.
The only difference is that in the first case, the three bad years happen right when Mary retires. In the second one, the crash occurs five years after her retirement.
In both cases, the average return and the standard deviation over the 15-year term is the same. But in the first case, Mary runs out of money before year 12; in the second, she is still going strong after 15 years and could go much longer depending on market conditions after the initial 15 years.
The point here is that sequence risk is a very real risk, very much out of Mary’s control, and not something that she can manage using the standard risk tools like diversification and hedging. In other words, Mary can do everything right until age 65 and still get caught out. That is uncertainty. And it is something that we all face.
If Mary chooses to continue drawing $75,000 from her lower-value portfolio, she will run out of money sooner than she had planned. However, a more prudent option would be to adapt by delaying retirement and/or reducing the amount of her planned withdrawals and wait for the markets and her portfolio to recover. This is a departure from her original plan, but that plan got punched in the mouth.
Not that adapting will be easy. Reducing planned expenditures is not a straightforward task for most. However, pretending that there is a plan that can anticipate and avoid every unpleasant circumstance is both ridiculous and dangerous. As an ancient Chinese proverb rightly puts it, “A wise man adapts himself to circumstances, as water shapes itself to the vessel that contains it.”
This doesn’t mean throwing caution to the wind or making hasty decisions based on emotion. Rather, it’s about staying informed, remaining flexible, and trusting in our ability to navigate choppy waters. By staying grounded in our long-term goals while remaining flexible in our tactics, we can position ourselves to thrive in an uncertain world.
In a world of uncertainty, our plans must include the ability to adapt. By embracing change and staying nimble in our approach, we can not only weather the storms but also capitalize on emerging opportunities.
So, the next time life throws you a curveball, remember to roll with the punches and adapt accordingly. Heraclitus said: “The only constant in life is change.”
The same holds true for investing.