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There's nothing like a stock market rout to remind investors how important it is to follow the tenets of sound investing. The past several months have been one such baptism by fire, with Standard & Poor's 500-stock index recently down 12% from its May peak. Blame the free fall on the Chinese stock market, plunging oil prices or the fact that the current bull market, at seven years old, is experiencing fatigue. Whatever the cause, such market mayhem is particularly worrisome for retirees and near-retirees, who have less time to make up for big market declines. Here are seven tips to help you survive the turmoil.
By Anne Kates Smith, Senior Editor
Jane Bennett Clark, Senior Editor
| March 2016
One of the important lessons from the devastating 2007-09 downturn is that even in the worst of times, "recoveries happen within a reasonable period," says financial planner Cicily Maton, of Aequus Wealth Management Resources, in Chicago. Since 1945, it has taken an average of just four months to recover from market declines of 10% to 20%. Bear markets (resulting in losses of 20% or more) have taken an average of 25 months to break even. Fight the urge to cut and run, and avoid selling your depreciated stocks, if you can. If you are in your seventies, remember that you have until December 31 to take required minimum distributions from your retirement accounts.
Even retirees should have an investment horizon long enough to weather this storm or whatever the market can dish out. For a retirement that can last decades, T. Rowe Price recommends that new retirees keep 40% to 60% of their assets in stocks. And because stocks stand up to inflation better than bonds and cash over time, even 90-year-olds should keep at least 20% of their assets in stocks.
If you've been regularly monitoring your portfolio, you've already been cutting back on stocks periodically over the past few years. Now is a particularly good time to revisit your investment mix to ensure that it is consistent with your tolerance for risk. During the bull market, "people were getting comfortable with those returns and may have let their stock allocation drift higher," says Maria Bruno, a senior investment strategist at Vanguard. "We've been reminding them to rebalance."
SEE ALSO: Thumbs Down on a Retiree Rule of Thumb
Investors who had planned to dump bond holdings in anticipation of higher interest rates just got a good lesson in how bonds, especially high-quality government issues, can provide ballast. In other words, when stock prices are being pummeled, bonds are often pushed higher by investors seeking a safe place to hide.
From the start of the year to the beginning of February, the yield on the benchmark 10-year Treasury bond dropped from 2.3% to 1.8%, and because bond prices and interest rates move in opposite directions, prices of Treasuries have climbed. In general, investors should own a mix of domestic and foreign bonds and U.S. and overseas stocks. And within the stock allocation, you should have a variety of market sectors. No single sector should claim more than 5% to 10% of your holdings, says T. Rowe Price senior financial planner Judith Ward.
Also remember that the headlines are not about you, says Ward. Retirees, especially, are likely to have a healthy mix of bonds and cash in their accounts to temper stock market declines. The market is not a monolith, and some of your stock holdings may buck the downtrend.
SEE ALSO: Assess Your Retirement Plan as the Markets Roil
This is no time to speculate. Look for companies with dependable earnings, impeccable balance sheets and healthy dividends, or funds that invest in such companies. Vanguard Dividend Growth (symbol VDIGX) -- a member of the Kiplinger 25, the list of our favorite no-load mutual funds -- delivers steady returns with below-average volatility by focusing on companies with low debt, high profitability and a consistent history of raising dividends. PowerShares S&P 500 Low Volatility Portfolio (SPLV) is a good choice for exchange-traded fund investors. Opportunistic investors can use market volatility to think about buying high-quality stocks, such as industry leaders Alphabet and Nike, on the cheap (see Play Defense With Fortress Stocks).
Instead of dumping stocks, use Social Security and any annuities, plus the portion of your portfolio that comprises cash and short-term CDs, to meet your expenses. Some advisers recommend creating three "buckets" of investments: one with cash and short-term CDs, the second with short- and intermediate-term bonds, and the third with stock and bond funds. Relying on the first bucket will leave the stocks-and-bonds bucket of your portfolio intact. If you've planned for the inevitable downturns (you did, right?), you should have enough in cash and cash-like investments to cover two to three years of living expenses. Eventually, you can use the second two buckets to replenish the first.
One other thought: A home-equity line of credit or reverse mortgage can provide income for living expenses while you wait for stocks to recover (see Reverse Mortgages Get a Makeover).
Don't rely blindly on a rule of thumb that bases its assumptions on historical returns rather than current conditions. For instance, the 4% rule -- a withdrawal strategy based on back-testing 30-year periods starting in 1926 -- says you can safely take 4% of your total portfolio in the first year of retirement and in subsequent years, adjusted for inflation. Now, with stocks down and 10-year Treasury bonds yielding less than 2%, you might be wise to scale back distributions to, say, 3% or less of total assets (plus an inflation adjustment) or to take 4% and skip the inflation adjustment.
Such measures are especially important if you're at the beginning of your retirement. An unrealistic first-year withdrawal during a bear market could cripple your portfolio's potential for long-term growth. "Today, retirement is very expensive," says David Blanchett, head of retirement research at Morningstar Investment Management, which provides retirement consulting and investing services. "The key is to be flexible."
If you don't have other income to offset lower withdrawals, consider deferring gifts, trips and other discretionary expenditures until the market stabilizes. Also keep in mind that your spending changes -- and typically declines -- in retirement. You may find that cutting back is more doable than you think, says Blanchett.
SEE ALSO: Make Your Retirement Savings Last a Lifetime
Sound drastic? Maybe so, but "delaying retirement does an amazing amount for improving retirement success," says Blanchett. Not only do you have more time to save, including making catch-up contributions to your retirement accounts, but you're also letting the money in your accounts grow, and you have fewer years during which you must rely on savings once you do retire, says Blanchett. "Working longer really reduces the stress on your portfolio."
SEE ALSO: 6 Ways to Avoid Outliving Your Retirement Nest Egg
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