2Q25 Market Review and Sequence of Return Risk
There are three sections to this post. What happened in the markets, what we expect going forward, and what we are doing as a result. In the “what we are doing,” I will illustrate a particular risk for retirees and near retirees called “Sequence of Return Risk.”
It’s summer in the US. The weather is hot. Apparently, so is the global economy. Stock markets around the world were power sun bathers last quarter. Investors put out the lawn chairs, stripped off their clothes and soaked in a blazing glory of radiant energy. Despite a gloomy April, by the end of June markets looked very pretty. The US stock market was up by 11% for the quarter. Global markets were up about the same.
Of course, markets are not monoliths, and not every sector of the market looked like Brad Pitt in Fight Club or Jennifer Aniston in Along came Polly. While the stock markets were like the attractive stars, the less-hot but still important bond market played their part as well. The US and global bond markets did their more predictable thing – up a bit over 1%.
What happened to the chaotic scary market of April? The umbrellas that were out back then were nowhere to be seen by the end of June.
Detailed Market Performance – a watch
The following link is a less than 5-minute narrated video of market performance and other resources in this blog post. Some people prefer a guided tour over a read. But, the tour will be too fast to read!
Detailed Market Performance – a read
To view a detailed analysis of investment performance in the US and global stock and bond markets, click on the button below.
The investment market performance report is prepared by Dimensional Fund Advisors (DFA), one of our partners in investment management and client support. If you would like to find out more about DFA, you can visit their website directly at: https://www.dimensional.com/
Investing is about the future – what will happen? As investors, we should be enjoying the sun AND checking the forecast. There are a head-spinning array of what-ifs that make forecasting highly uncertain.
On the sunny side, here are three questions, presented in no particular order:
- Will the tariff negotiations settle down as deals between countries finalize?
- Will interest rates start to drop?
- Will Artificial Intelligence (AI) continue to help businesses become even more profitable?
On the “grab your galoshes and parkas” side (again, no particular order):
- Will global trade negotiations go “off the rails” into chaos, leading to higher uncertainty?
- Will AI lead to such massive job losses that unemployment balloons and we fall into a recession?
- Will interest rates get manipulated, and the fed lose its power to help bolster or cushion the economy?
While the short-term is difficult to accurately predict, the longer-term forecast remains “sunny with a strong possibility of climate change.” One prediction that I feel fairly confident in is that change will bring about winners and losers. I predict that we will all experience losses. In the wins column, I predict that investment markets, as a harnesser of human ingenuity, will likely reward the winners. I want to be a part of that reward system. However, I will also keep my eyes on the horizon, wondering “what would happen if the weather turns?”
At Trail FP, trekking through the sun, rain, wind and snow of investment markets is a core piece of our business with clients. Once we have put together the map (the financial plan), we work to ensure that your investment portfolio has the right mix of weather exposure:
Is it getting enough sun, enough vitamin D?
Does it have a sun shirt and is it using it?
How is its skin looking?
How does the closet of umbrellas and rain gear look?
Stepping away from the metaphors, our standard advice is to make sure that you have 3-5 years worth of spending held outside of the stock market. For those who are still working, that money is in future paychecks. For those in or nearing distribution phase (AKA retirement), we are extending our time-frames for safety to a minimum of 5 years, and possibly as many as 10 years. As Warren Buffet has said, “Be fearful when others are greedy and greedy when others are fearful.” Leaning into the safety side (AKA “fearful”) seems prudent right now.
As an example for why protectionist investing may be a reasonable course of action, I made a short video to illustrate the concept of “Sequence of Return Risk.” The narrated video is below.
Sequence of Return Risk for those in or near Retirement
While the markets have done well, we should always be prepared for bad results. People in their “accumulation days” (i.e. working and saving) generally have time to absorb and recover from downturns. Those who are in distribution (i.e. in or near retirement) may not. There is a specific risk called the “Sequence of Return Risk” that we are evaluating for all of our clients who are near or in distribution. In essence, the Sequence of Return risk addresses the risk of poor market performance occurring early in a distribution phase. What could happen is that the market goes into a poor performance phase at the same time that the person withdraws money, leading to a lower portfolio balance. Under some conditions, this could lead to a person running out of money much sooner than under “normal” conditions. The following 3-minute video illustrates one such scenario:
The simulation illustrated is a very generalized model meant only to illustrate a concept rather than to produce a forecast for the fictitious client’s future. It should be pointed out that this is a risk discussion, in other words we are talking about less likely outcomes, but where the impact could be large. The magnitude of this risk is very client-specific, and we would encourage you to talk to a financial professional if you are wondering whether it is a risk you should take action to mitigate.
Disclosures and end notes
Information contained within is generalized information about investing and the investment markets. It should not be considered investment advice, personalized or otherwise. Past investment performance is not a guarantee of future investment performance. Investing in markets comes with an inherent risk of losing money.
Voting for “Best of the Northwest” is open! We appreciate the “Bellingham Alive” magazine’s effort to showcase local people and businesses who are doing good work for the community. Make your voice heard and vote! Here is the link:
