As people near retirement, they need to be aware of their investment portfolios. While the old way of thinking may not be appropriate anymore, with retirees getting out of the stock market altogether and into bonds, you still need to have a plan and stick to it. If the previous few months has taught us nothing at all, we can be certain that the markets are unpredictable at best. Just a few months ago people were afraid that we had entered a bear market, and then we experienced almost a month of all-time highs. Oil is up then down and like the markets, no one is certain where it will go next. All I do know is that timing the markets will lead you to nothing but trouble. But there are some steps that you can take to mitigate the damage a fluctuating market can do to your investments.
The first rule is do not panic under any circumstance, but be prepared for whatever may happen. From 2007 to 2009 we experienced what may very well have been one of the worst markets since the Great Depression and look at where we are today. Since 1945 when a market has dropped between 10% and 20% it has taken only four months to break-even once again. And for those bear markets where we have seen drops of more than 20% the break-even point has been only 25 months. So while the markets can derail your plans if you are patient and have some time due to proper planning your investments will rebound quicker than you think.
So how do you prepare for a bear market in the first place? Well, that begins with rebalancing in bull markets and staying true to your risk tolerance and investing plan. As I mentioned, gone are the days when you retire and shift all of your assets to bonds. People are living longer and in order to keep up with our longer lives and inflation, we need to remain in the stock markets. And I am not talking just a little, but a significant portion of your portfolio needs to remain in the markets. Most people who are retired need to have between 40% and 60% of their assets in the stock market when they enter retirement. Yes, as you get older you can shift more from stocks to bonds but even a young 90-year-old needs to have between 15% and 20% in the game. So monitor your portfolio and adjust it as needed by evaluating your risk tolerance and asset allocation.
And that leads me to keeping your portfolio diversified even when you are rebalancing your assets. I would recommend that you not keep more than 10% in any one sector within the equities markets. And then you need to find your level of risk that you are comfortable with in regards to equities and bonds. Then you can look to foreign and domestic investments as well. The US may like to think the world revolves around it, but the reality is by expanding beyond the US borders you can reduce your overall risks as many areas react differently than the US markets.
But do not mistake diversification and expanding beyond the borders as having high-quality investments. While those are indeed important aspects to surviving the ups and downs of the markets you must have high-quality assets in your portfolio. So when investing in equities look at blue-chip companies with strong balance sheets and with stable management teams in place. And there are numerous mutual funds and exchange traded funds in which you can invest to get quality investments while reducing risks.
But bear markets and corrections will always occur, so it is wise to be prepared for these events when they happen. So keep some portion of your portfolio as liquid as you can even if it means having cash investments such as CDs. It is wise to have between two and three years’ worth of expenses stashed in cash to survive any downturns as they will generally correct themselves in just over two years.
But when placing assets in cash do not go overboard and dip into your earning assets or you could be missing opportunities to grow your asset base even while in retirement. The old way of thinking was you could remove 4% of your portfolio a year and have enough to live on in retirement. Well, with people living longer and the markets being as unpredictable as ever the 4% rule may or may not be wise. If you are in a bear market taking 4% may cause more harm than good in the fact you are selling low. This is why it is important to keep two to three years of expenses in cash in your accounts so you can sell when your assets are priced higher. In down years it may be wise to take less than the 4% but in good years resist the temptation to take more than your allotted 4%.
And when all else fails, and you are approaching retirement you can always postpone it and work a little longer. This will allow you to save extra money while your assets continue to work for you for some much needed additional years. The longer you leave your portfolio alone you will hopefully see its principal grow and then when it is time to retire you will be able to fund it in the manner in which you dreamed.
If you need any additional information or have any questions, feel free to contact me directly or leave a message here.
