The Impact of a Stock Market Downturn

November 17, 2022

You are likely aware that the stock market has been down this year. The S&P 500 Index, a broad measure of the overall US market, has lost 20% of its value as of late October. Typically, when stocks are down bonds show positive returns because investors look for safe areas to move their investments and avoid further pain. This year, however, bonds have been down as well, giving investors no place to hide. Thus, most investors are facing significantly lower account values.

Lower portfolio values can affect divorce negotiations for several reasons. Depending on what stage of life one is in the following fears might be felt:

Will I be able to retire? Investors who are nearing retirement are seeing their nest egg shrink, and perhaps their picture of retirement changing. Couple that change with the loss of assets from a divorce split and the future can look even more bleak.

Will I have enough to live on? Those who are already drawing on their investments may panic because a shrinking portfolio means that the amount that is normally withdrawn is a larger percentage of the pot. That means the pot could be emptied sooner than expected.

These fears could certainly play into negotiations in many ways. Perhaps a higher-earning spouse would like to reduce their obligation of spousal support so that more money can be diverted back into their remaining investment portfolio. On the other hand, the lower-earning spouse may need more assets than previously thought in order to support their own living needs or retirement plan. There are often competing needs on both sides of the table, but they can be exacerbated by a bad year in the markets.

Some clients just need education on the long-term trend of the markets. The fear that losses will continue until the stock market is down to $0 may seem crazy to seasoned investors but a natural progression to the inexperienced of what they are currently seeing.  Others may need help recognizing that losses they see are on paper and are not real until the investment is sold.

Still others may need the help of projections to illustrate that the future is not as bleak as they expect. Even with investment losses they have enough money to support their lifestyle; alternatively, some may need help recognizing that the future is not as rosy as it looks and actions need to be taken, such as going back to work or selling the house.

Good financial projections and discussions help ease fears and further negotiations. It can assist you in getting your client to a place of acceptance, at which they know what they need, what they will have (post-divorce) and what they must do to achieve their goals

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