As of May 15, 2022, the Russell 3000 stock market index was down 17.2% for the year (and also coincidently down 17.2% since its peak on the first trading day of the year). While maybe less well-known than other indices, the Russell 3000 Index includes approximately 98% of U.S. publicly traded companies, so changes in its value are a good measure of overall U.S. stock market performance. With the stock market dropping nearly 17% in a short four and a half months, you may be concerned how this impacts your financial plan.

The short answer is, maybe not much at all.

If your financial plan was developed using modern financial planning software that includes Monte Carlo analyses, much, if not all, of the recent stock market volatility is already accounted for. For a refresher on what Monte Carlo analysis is and how it works, see the article “Are You on Track Financially? One Number Gives the Answer.”

Monte Carlo analysis stress tests your financial plan, varying stock market rates of return using historically observed stock market volatility. The results assume that stock markets gyrate over time, and therefore the outcomes in your financial plan don’t change as stock market volatility actually comes to pass. The volatility was already assumed. It’s included. It’s accounted for. It’s not news.

For a truly scary example of how this works from not too long ago, think back to the Great Recession of 2008–09, when stock markets dropped nearly continuously for about 18 months. The rate of return on the Russell 3000 Index from October 2007 to the end of February 2009 was ˗50.3%. Yes, you read that right. The U.S. stock market lost half its value from peak to trough during that episode. How did that affect financial plans we were monitoring, and how did it play out?

For financial plans, we updated at the bottom of the market—with the assumption there would be no recovery in the value of investment portfolios (i.e., the Great Recession caused a one-time reset to lower values, and portfolios would resume their normal growth from this lower level)—the main impact for the majority of clients was to push out retirement a year or two. You can imagine what a relief that was to clients and to us! Even during the most severe stock market downturn since the Great Depression in 1929, and even if stock prices didn’t recover, the worst-case scenario was having to work a couple of extra years. That’s because most of that stock market volatility was already accounted for in the Monte Carlo analysis. Stress testing worked.

As it turned out, stock markets did recover, and within about two years, client financial plans were working as well as before the Great Recession with their original (earlier) planned retirement dates intact.

The same thing happened during the COVID Crash when the U.S. stock market was down over 20% in two months. While this drop in stock market values wasn’t as large as we experienced during the Great Recession, the time period was much shorter, making it more frightening for many people who were already dealing with a rapidly spreading infectious disease and quarantine. However, in the case of the pandemic, markets generally recovered quickly—within a year—and many clients never perceived a dip in their financial plan performance.

All of this helps explain why the current 17% downturn may not be impacting your financial plan much at all. It’s a more “typical” downturn than the Great Recession and the COVID Crash, and is well accounted for by Monte Carlo analysis.

To ride out the downturn, stick to your investment plan and consider delaying large discretionary cash outflows that would require you to take money from your investments while they’re down. For a few other ideas about how to turn the recent slide to your advantage, see the article “Five Ways to Take Advantage of Market Downturns.”

Try your best to keep steady, and remember, this too shall pass.

Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you’d like to know how the recent downturn is affecting your financial plan, schedule a complimentary consultation.