How Should Retirees Prepare for a Bear Market?

COVID-19 Stock Market Decline

We are a few days removed from one of the quickest market declines in market history. This is fresh off our post on how retirees should invest in a bull market!!

Quick overview: the markets have been at all-time highs. Since 2009 many stock markets have doubled or tripled in price. Markets don’t go up forever.

The coronavirus is an unknown and markets hate uncertainty. It has the potential to dramatically slow world trade, curb growth and hurt companies’ earnings which ultimately affects stock prices.

How Did You Feel About Your Portfolio Losing Money?

It’s been a long time since we’ve experienced a significant market decline. For the better part of a decade the stock market has been on an upwards path.

People experienced fear, worry, and anxiety last week. I didn’t enjoy it. I’ve been working in the investment arena since 1998. I’ve seen a lot in that time. I know the mantra of staying the course, being diversified, and not timing the market. That doesn’t mean it’s not ok to feel anxious during market meltdowns. Nobody, even long-term investors, enjoy seeing such a rapid decline.

How Did You React to Your Portfolio Losing Money?

Investors fell into three camps last week. Some did not nothing. Whether out of sticking to a disciplined plan of staying invested or a deer in the headlights not knowing what to do moment…they stayed put. Others saw bargains in the stock market and put cash to work. And A LOT of people sold out of fear. Participants in 401(k) plans increased trading activity to record levels. This kind of panic selling goes to show why investors historically underperform the stock market.

How did you react? In terms of investing I made one tiny adjustment to the globally diversified portfolios I manage. I sold out of a position in an airline stock recognizing that global airline travel could face a prolonged slump. But that is a miniscule change in the context of our globally diversified portfolios.

What I did was listen to my clients. I did not proactively reach out to all of my clients. For a couple of years I’ve been educating them as to the possibility of market declines. They know my philosophy. They hire me to handle the worry in their portfolios. But I’ve developed relationships with them. I know the ones who tend to worry more than others. And it’s ok for them to do so. So I checked in with those clients to make sure they were still comfortable with their long term financial plan and investment strategies. Not one client wanted to deviate from their individual planning framework. They hired me to help during these emotional times and they trust my guidance.

Preparing for a Bear Market

Nobody can predict bear markets (a market decline of 20%) but we can prepare for them. Since the Great Depression, bear markets have average a decline of 42% and lasted an average of 22 months.

I focus on the 22 months. Could you afford not touching your stock investments for 22 months? For retiree clients of Birch Investments I prefer to allocate three years of living expenses to fixed income as a starting point.

How does that look? Take a retiree who needs $50,000 a year from the assets we manage. We would require $150,000 in bond/fixed income investments before allocating to the stock market. That way, if we have a severe bear market we can let the funds allocated to stocks take the time to recover without selling at reduced prices. That doesn’t mean we can’t allocate more to fixed income. After the basic spending requirement is met we take into account other factors such as risk tolerance, market outlooks and more. However as a general rule we find our wealth management clients worry less knowing that the next three years of living expenses are covered regardless of where the stock market is headed.

So if we experience another bear market we have a plan. It won’t be fun. It won’t be easy. But it won’t be based on timing the markets. Nobody can guess the near-term future of the markets. If they could they’d be retired on a beach somewhere. So I will continue to focus on the things we can control. Prudent spending policies. Globally diversified portfolios. A personal relationship with my clients.

Perhaps you’re missing that kind of relationship with your advisor. Maybe you’ve been doing it yourself but need an accountability partner. If that sounds like you feel free to reach out.

Brian Berkenhoff, CFA


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