How to Survive a Market Decline during Retirement
Perhaps the greatest financial fear most retirees face is the fear of losing their money. Fear of loss, which in most cases is personified by a market decline, can keep retirees from making sound financial decisions. Unfortunately, the tradeoff to staying out of the market for the sake of completely avoiding a market decline exposes you to another threatening menace, inflation. All investors must endure some asset fluctuation if they are to keep pace and beat the ever present specter of higher prices. When the inevitable market decline does rear its ugly head, how you react during the decline is just as important as the investments you had going into the decline. Below is a guide of things that can ease the blow.
- Re-evaluate your asset allocation: Make sure that the percentage of each asset class is appropriate for your age and risk tolerance. It would not be appropriate for a 68 year old retiree to be 100% stocks. It is very important that your portfolio have some stocks, bonds, real estate, commodities, and cash. These asset classes all move in different directions at different times. Stocks may rise while bonds fall. Ideally, you want many different asset classes that zig and zag at different times. If you have enough cash and bonds on hand, you can use these liquid, virtually guaranteed vehicles to allow you to ride out the storm that stocks may be experiencing.
- Don’t Panic: Remember, this too will pass. This time is not different. Spring always follows winter. The market and the economy go through good times and bad. Selling during the bad times may seem like wisdom, but it is a recipe for disaster. It is obvious that no one can consistently predict the market or economic trends. This has been proven time and again. So, selling into a market decline and buying during times of strength means that you are buying high and selling low.
- Rebalance your portfolio: Instead of buying high and selling low, how about buying low and selling high. Rebalancing your portfolio allows you to do just that. Rebalancing means bringing your portfolio back to its original allocation. So, if your portfolio was supposed to be 50% stocks and 50% bonds, your bond percentage would increase as the market moved lower and your stocks became worth less. This creates an opportune time to sell some bonds (which have done well) and buy some stocks (which have done poorly) in order to return to the 50/50 allocation you originally intended. Rebalancing can add 1%-2% additional return on average annually over the life of the portfolio.