“Generally, a fall of fifty feet or more will kill almost anyone.” This is what my rappelling instructor told me. Although I had been a rock climber since I was a young adult, I was in my mid-forties when I began rappelling. Together with good friends I rappelled off cliffs and even buildings. I actually was able to participate in a seasonal event associated with the Christmas holiday in downtown Cincinnati by rappelling off a building with others dressed as Santa, Reindeer, and an Elf.
Although my rappel master specified fifty feet, tree arborists cite thirty feet as the cutoff for fatality in a fall. That is, most people who fall from thirty feet or higher die. Even if you land on your feet and have the leg strength to soak up the force of the landing, you are still going to break bones or suffer internal injuries.
According to the World Health Organization, “Globally, falls are a major public health problem. An estimated 684,000 fatal falls occur each year, making it the second leading cause of unintentional injury death, after road traffic injuries.”1
Gravity causes any object in free fall to accelerate. The standard value is 980.665 centimeters per second per second (so-called “g force”). Acceleration increases proportional to the square root of the height of the fall, but directly proportional to time. If you fall for one second you reach the speed of 32 feet per second. If you fall for two seconds your acceleration will reach 64 feet per second.
As you are falling it is gravity that causes your acceleration to go faster and faster the longer you fall. Once you have fallen approximately 450 meters you have reached terminal velocity. This means you will not fall any faster. Any height above 450 meters means your survivability is unaltered. Rock climbers know that once you get over a certain height, you’re not going to survive a fall anyway. (This, strangely, gives them courage.)
Point: Fifty feet is the “red line” of falling. One reason for this is the design of our bodies. We are built top heavy. At a certain height, we will end up landing upside down. On our heads.
Application: Climbers use unusual caution when operating at heights above fifty feet. Climbers often use a top rope. Rappelers double- and triple-check harnesses.
We use the term “red line” when describing behavior that has become unacceptable. Additionally, a “red line” is the “fastest, farthest, or highest point or degree considered safe.”2 Beyond the red line, it is hard to recover.
For life on planet earth, there are red lines in every direction, and for all activities. Consider the National Football League (NFL). When a game comes down to the last two minutes, there is a differential in team scores that presents a red line.
On November 27, 1966, the Washington Redskins scored 72 points versus the Giants. That is the most points scored by any team in NFL history. But it took them four quarters of play (sixty minutes) to achieve that score.
On December 8, 2013, however, the Minnesota Vikings and Baltimore Ravens met in Baltimore and played an amazing game in snow and cold. With two minutes and five seconds to go, Minnesota was leading Baltimore 12 to 7. The two teams combined for over 20 points in the final two minutes of regulation and scored five touchdowns in the last two minutes and five seconds! There were six lead changes in the fourth quarter. In one of the craziest finishes in NFL history, Baltimore would defeat Minnesota by the score of 29-26.
Point: The red line in the NFL for overcoming a point deficit in the last two minutes of a game is two touchdowns. Rarely can a team score 14 points more than their opponent in the last two minutes of regulation.
Application: Anticipating that they might find themselves behind in the score near the end of a game, NFL teams practice the two-minute drill. They become more aggressive in their play calling. They make better use of the clock. They use the sidelines. They increase the tempo of play. They deploy rarely used onside kicks and trick plays.
Red Lines in Financial Services
In financial services we work with people and their money. Because time is fleeting, and money is finite, red lines arise in many situations.
Red Line Example #1, Pre-Retirement Period
The transition from earning an income (and setting aside savings and investments) to drawing an income from accumulated net worth is a major change. For all people invested in the markets, a crash is an emotionally stressful event. This is particularly true for retirees and pre-retirees.
For anyone soon to retire, a prolonged stock market downturn could affect their retirement plans. A person’s investment portfolio tends to be largest near retirement, in anticipation of drawing down income. If retirement income is dependent on taking withdrawals from a stock portfolio (within an IRA, 401k, or other qualified plan), and the market suffers a downturn, the prospective retiree faces two consequences:
- When stock prices are low, more shares must be sold in order to generate the same amount of income anticipated before the downturn.
- Selling stocks in the portfolio in a bad market can permanently undermine the ability to participate in market rebounds.
Volatility is when markets go up and down over time. For younger investors, market volatility is a nuisance. For someone about to retire, or newly retired, volatility can be very damaging to the plans for sustainable income.
Between October, 2007, and November, 2008, the Dow Jones lost more than 40 percent. Assets in defined contribution plans and IRAs lost about 30 percent of their value in that same period. If left untouched by withdrawals, those funds recovered over the next few years. These eventual gains were available to pre-retirees who continued to work longer than they had intended, reduced their spending, or had other sources of income that allowed them to postpone taking withdrawals.
The red line for pre-retirees is the amount of income they can derive from other assets (cash, etc.) if the value of their securities declines due to a market adjustment.
The best way to avoid selling price-depressed assets is to prepare in advance. Knowing that the invested assets will be needed soon for income, it is wise to hold “the equivalent of at least a year’s worth of anticipated withdrawals in cash investments—such as checking or savings accounts, money market funds or certificates of deposit (CDs)—with another two to four years’ worth in relatively liquid, conservative investments such as short-term Treasuries and other high-quality bonds or short-term bond funds.”3
“A four-year cushion should be enough to help you manage your risk in most bear markets. According to research by the Schwab Center for Financial Research, from the 1960s through 2021, the average peak-to-peak recovery time for a diversified index of stocks in bear markets was about three and a half years.”4
Point: The five years prior to retirement are the equivalent of the final two minutes in a football game. Just as it is improbable for an NFL team to overcome a two-touchdown deficit in the last two minutes, it is extremely difficult for someone to regain the growth curve of an asset portfolio if the market suffers a downturn in the few years leading up to retirement.
- Clients need to prepare for market downturns in the years leading up to retirement by accumulating one to four years’ worth of income in conservative, liquid, safe, cash-like accounts.
- Some independent financial professionals (IFPs) urge their clients to deploy an Age-Based Asset Allocation model based on the fact that a person’s age dictates the amount of risk that is reasonable to take on. One model subtracts the person’s age from 100 and the result is the percentage of stock that person should retain in the portfolio. Someone age 40 should have 60 percent invested in stocks. Conversely, someone age 60 should have 40 percent invested in stocks. Preservation of capital replaces risk tolerance as the objective.
Red Line Example #2, The Retirement Years
Many people who retire are unaware of the risk that can steal huge amounts of potential income. This is the “sequence of returns” risk.
Down markets can pose significant sequence of returns risk in the early years of retirement. The risk has to do with the order, or sequence, of stock returns over time, combined with investment portfolio withdrawals, and the impact on the retirement savings.
Here’s how a sequence of returns risk can impact retirement savings: Say a person retires at age 65 with $1 million invested in stocks and securities with the goal of withdrawing $40,000 each year. If at the outset of this person’s retirement the portfolio is subject to a bear market, and loses 30 percent of its value, more shares of stock than anticipated will need to be sold in order for the $40,000 income goal to be achieved. Also, when the market rebounds, the sold shares are gone and no future gain is available.
However, if the order of yearly returns is reversed and the bear market happens much later, toward the end of the person’s life, the downturn might be offset by growth of the portfolio’s value in the intervening years.
The red line for retirees is not the specific returns over time but the order of those returns.
Point: IFPs must help their clients prepare for retirement in more ways than just accumulating necessary funds. They must also help clients plan for withdrawing funds from other sources in down markets.
IFPs can help their clients combat the sequence of returns risk in these ways:
- First, by urging clients to spend more conservatively during down markets because the less they have to withdraw the less the impact on the portfolio overall.
- Second, IFPs can recommend products like permanent life insurance which build tax-deferred cash values that avail the policyowner the ability to withdraw funds that are potentially income-tax-free so that, in down market years, the retirement investments are not sold at decreased prices and can rebound as the markets recover.
- Third, the IFP can make sure clients know where they stand in terms of retirement income readiness, and therefore give clients some control over the date of their retirement.
- The IFP can urge clients to factor in withdrawal sequencing with their Social Security start date.
A red line is the fastest, farthest, or highest point or degree considered safe, beyond which it is hard to recover.
Red line injuries from falling cannot be blamed on gravity. Injuries arise from lack of caution and the failure to invest time and effort in proper preparation.
NFL teams that find themselves losing by more than two touchdowns (the red line) in the final two minutes of regulation cannot always overcome the failures of the previous 58 minutes of play.
Red lines face us in every aspect of life, including in our financial lives.
The IFP serves best when clients know what to do, if and when a market crash happens, either in the pre-retirement years or during retirement. Market corrections often force investors to sell securities that have lost significant value, and the impact on long-term growth snowballs.
IFPs can help clients protect themselves and their money by preparing a rational, well documented plan. The plan should specify, in advance, exactly what the client will do if a market downturn happens. Market corrections are emotional and stressful events. The hardest part of a market crash is sticking to the plan and not selling in a panic.
Clients who sell their stocks at a market low cannot recover. If a plan is in place that anticipates a downturn, and the clients hold onto price-depressed securities, these securities will likely regain their pre-crash positions.
Albert Einstein wrote, “You can’t blame gravity for falling in love.”
Similarly, you cannot blame market downturns for failure to plan. IFPs can help their clients plan and prepare for the red line risks of pre-retirement, or mid-retirement, market crashes.