3 Ways to Prepare for a Bear Market

Everybody talks about the possibility of a bear market, but few seem interested in doing anything about it.

Despite the kind of national and global uncertainty Wall Street traditionally despises, this bull market keeps charging along. Investors don’t want to get out too soon and risk missing out on more gains. Some have become even more aggressive over the past year.

Still, there’s always that niggling knowledge that what goes up must come down … so people worry.

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One of my favorite Warren Buffett quotes is that investors should be “fearful when others are greedy and greedy when others are fearful.” But what is one supposed to do when others are both fearful and greedy?

Prepare.

Here are a few ways you can safeguard your nest egg before the next downturn arrives.

1. Develop an income plan.

If you’re in or near retirement, do you know what your income sources are and when you’ll tap them? Most retirees rely on three or four basic income streams: Social Security, a pension and/or tax-deferred retirement account and maybe some personal savings. If you don’t have a pension or your guaranteed income won’t be enough to cover your basic lifestyle needs, you might want to look at creating your own guaranteed income plan with an annuity.

Annuities are guaranteed because they are backed by the financial strength of the insurance carrier. And if all or most of your retirement and personal savings are tied to the market, think about setting aside a few years’ worth of income in cash or very stable investments. That way, you’ll be ready to ride out the rougher years.

2. Plan your investments appropriately.

It’s daunting, but not devastating, if the market dips while you’re still working. You still have your paycheck to count on, you’re still putting money into your retirement account, and you have plenty of time to recover. When you’re close to or in retirement, it’s a little more intimidating. Your recovery window is smaller — but it isn’t non-existent. If you retire at 67, you likely will still need money in 15 or 20 years. If you have money left over once you’ve covered your basic income needs, you can invest it more aggressively for those later years — but you should do it with a long-term view.

Talk to a financial adviser about your risk tolerance, and know yourself: If you can’t handle a bear market emotionally or financially, it’s best to stick to more conservative investments in retirement.

3. Know your risk.

We often have an irrational fear of things that have a low probability of actually hurting us. When we swim in the ocean, for example, we fret about sharks — even though shark attacks claim only one American life each year on average. Cows claim 20 American lives in an average year (opens in new tab), yet most people don’t fear going to a farm. If you’re losing sleep over what could happen to your nest egg in a bear market, find out if your worries are warranted. A financial adviser can stress test your portfolio and illustrate how it would have held up during the tech bubble of 2000 or the mortgage crisis of 2008. He or she also can show you how long it would take to recover from a similar downturn.

Investors always want to know when the next bear market will occur. The answer, of course, is no one knows.

What you can anticipate with some accuracy, though, is how much money you’ll need in retirement and when you’ll need it. A comprehensive retirement plan can help you make the most of what you have and — just as important — help you prepare for the worst.

Kim Franke-Folstad contributed to this article.