An explanation of strategies and our process
With the recent stock market volatility, we wanted to share our thoughts on a crucial topic in long-term planning: portfolio distributions. How do we approach portfolio distributions when the stock market is in a correction?
Managing portfolio distributions during a market drawdown requires a disciplined, long-term approach that prioritizes stability, diversification, and strategic flexibility. At Shepherd, our goal is to help clients navigate volatility without compromising their retirement income needs or derailing their financial plans. Below are key strategies within our process to achieve this balance.
Long-Term Planning as a Foundation
Market downturns are inevitable, but a well-structured financial plan anticipates these fluctuations. At Shepherd, each of our financial plans accounts for frequent market drawdowns as a reality of investing through retirement. Historical data shows that markets recover over time, and reacting impulsively to short-term declines often locks in losses. A time-tested withdrawal strategy, such as the 4% rule adjusted for inflation, provides a framework for sustainable distributions.
However, flexibility is critical: temporarily reducing withdrawals by 5–10% during severe drawdowns can preserve capital and allow portfolios to recover. This approach aligns with our “total return” philosophy, which focuses on overall portfolio growth rather than relying solely on dividends or interest.
We also know that flexibility on withdrawals is not always possible, and sometimes, unexpected cash needs arise at inopportune times—this leads us to our second strategy to manage distributions during a downturn: portfolio diversification.
The Role of Diversification
A diversified portfolio is a cornerstone of resilience during market stress. By spreading investments across asset classes—such as equities, bonds, and alternative asset classes —retirees reduce exposure to any single investment’s volatility. For example:
- Equities provide growth potential but carry higher risk.
- Bonds offer stability and income, acting as a buffer during equity declines.
- Alternative assets can lower correlation and are sensitive to different economic risks than stocks and bonds.
- Cash reserves (3–12 months of expenses) prevent forced sales of depreciated assets.
The “bucket strategy” exemplifies this principle, segregating assets into short-, medium-, and long-term buckets to match liquidity needs with appropriate investments. Short-term buckets (cash, Certificates of Deposit or CDs) cover immediate expenses, while long-term buckets (stocks, real estate) focus on growth and recovery.
Strategic Distribution Adjustments
During drawdowns, proactive adjustments can mitigate long-term damage:
- Dynamic Withdrawals: Tie withdrawals to portfolio performance. Select withdrawals from asset classes performing well to avoid selling depressed assets.
- Tax Efficiency: Prioritize selling assets in taxable accounts to shield tax-advantaged accounts (e.g., IRAs) from early depletion.
- Rebalancing: Use market declines as an opportunity to rebalance toward target allocations. Buying undervalued assets positions the portfolio for recovery.
- If you wish to do any of the following, please contact your advisor for guidance.
Conclusion
Managing distributions during a market drawdown hinges on preparation, diversification, and adaptability. Investors can weather downturns without sacrificing their financial security by maintaining a long-term outlook, structuring portfolios to withstand volatility, and adjusting withdrawals strategically. At Shepherd, we blend empirical strategies with empathetic guidance so that clients remain focused on their goals rather than short-term turbulence.
We will close with our often-cited reminder that your time horizon is generally much longer than market volatility can last. Having a plan and keeping a long-term perspective on your goals are incredibly important during short-term uncertainty.
Please reach out to us with any questions. Your team at Shepherd is here to serve you. We will continue to communicate with you and provide as much information as possible during this time.
For more insights, see our previous commentaries also on the Insights blog!
Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All indices are unmanaged and may not be invested into directly.
Investment advice offered through Shepherd Financial Partners, LLC. A registered investment advisor. Registration as an investment advisor does not imply any level of skill or training.
Securities offered through LPL Financial, member FINRA/SIPC. Shepherd Financial Partners and LPL Financial are separate entities. Additional information, including management fees and expenses, is provided on Shepherd Financial Partners, LLC’s Form ADV Part 2, which is available by request.
The content is developed from sources believed to be providing accurate information.
Tracking #: 723102