Bear-Market Defense: Here’s Your Best Game Plan

increasingly nervous.

Craig Birk, Executive Vice President, Portfolio Management, answers investors’ top questions about optimizing your portfolio during market dives.

As the bull market diminishes,retirement savers are becomingincreasingly nervous. A recent poll (opens in new tab) conducted in November 2018 byPersonal Capital and Kiplinger’s Personal Finance confirms those fears: A majority of the 1,014 investors we surveyed say they’re worried about the impact of a market swoon before (61%) or during (62%) retirement.

Given recent market volatility, their concerns are no doubt climbing even higher, so here are answers to questions I hear often. Investors will want to keep this information in mind over the coming weeks and months.

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1. How do I know when it’s an‘official’ bear market?

History shows us that markets arealways cyclical, with bulls giving wayto bears, and vice versa. Since 1929,US investors have dealt with 20 bears—defined as a 20% or more drop in a given index. It’s easy to forget, but generally the good times last longer than thescary declines. Indeed, this bull market has been on the cusp of being the longest in history.

Another fact is that a bear’s bite can vary considerably. For example, theStandard & Poor’s 500-stock indexhas lost more than half of its value four different times over the past 100 years, including each of the last two majorbear markets. Bears are always uncomfortable, but most aren’t that bad. We don’t see the extreme valuations of 1999 or the leverage of 2008, so we expect the next bear will be less painful than these last two.

2. What should I do if or when a bear market begins?

Ideally, an investment strategy shouldbe designed with the expectation that a bear market can come at any time. There should be no reason to panic or deviate from the strategy.

That said, market corrections likewhat we experienced in the fourthquarter of 2018 can be a good time for areality check on overall risk tolerance.For example, if you’re losing sleep when the market dives by 15%, your portfolio may be too risky.

At that point, it’s still OK to add diversification to the mix. Once a full-blown bear market arrives, however, it is usually too late to sell. Exiting stocks after things already feel terrible is one of the biggest mistakes people make.

3. What’s the best way to staydiversified during a downturn?

Ideally, investors should periodicallyrebalance in all phases of the marketcycle. That means selling stocks and buying bonds when the market is strong, and selling bonds to buy stocks when things feel bleak.

This is hard emotionally for manypeople, however. And it’s where a disciplined advisor can add real value andexperienced guidance.

4. Any specific sectors to watch fordefensive or rebound moves?

Unfortunately, many investors time their sector bets with a rear-view mirror, which can be painful. Defensive sectors, such as utilities and consumer staples, generally hold up better in downturns. Stocks that performed best in the bull tend to fall the most in the bear.

This time around that tilt applies toUS growth stocks, and tech in particular. Small caps may also provide an opportunity, as they often plunge in bear markets but tend to bounce the hardest, historically outperforming in rebounds. A good rule is to have meaningful exposure to all sectors and excessive exposure to none.

5. What should I do if I’m hoping to retire soon?

We believe everyone should have athree- to six-month emergency fundand that other liquid assets for generalretirement expenses should be invested in a diversified portfolio. But that doesn’t mean the portfolio has to be aggressive.A good portfolio for many approachingor in retirement can be mostly bonds.It’s simply wise to have a personalized strategy designed for both up and down markets.

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