Living on Your Investments? What Happens When a Bear Market Hits?
Investors are often told to "stay the course" even as stock markets go through tough times. However, if you're retired, that advice could put your nest egg in jeopardy.


Many people follow a buy-hold strategy when it comes to investing: You know, just hold on to your stocks through the bad times, and you’ll be all right in the end. Is it true? I don’t think so.
I think buy-hold is a dangerous philosophy, especially if you are a retiree living on your investments. Bear markets tend to occur every three years on average (we are way overdue) and could devastate your retirement nest egg if you keep it in the market.
Let’s examine what could have happened if you had hypothetically invested $1 million in an S&P 500 index fund that exactly tracked the S&P 500, which did not charge any internal expenses or fees. You did not incur any external investment management fees for managing that fund, and you “stayed the course” during a period that included bear markets.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In January of 2000, the S&P 500 was at 1441. In January 2018, the S&P 500 reached a new all-time high of 2872, almost doubling over that 18-year period. Using the rule of 72* to find your rate of return, you’d divide 72 by 18 years and find that your investments averaged a 4% return. Had you drawn 4% each year from your investment, as many people say you should to cover your retirement cost-of-living, you might think you’d would still have your original $1 million today.
Unfortunately, you’d be wrong.
To begin with, you have to consider inflation. A million today does not have the same purchasing power as $1 million 18 years ago. Taking that into account, the $1 million you started with would actually be worth about $600,000.
The other issue is that the S&P 500 index didn’t deliver 4% evenly over that period. It fell close to 50% over the two years of the Y2K bear market, and you would have compounded that loss by taking out the 4% you needed to live on. The same thing happened during the 2008 bear market: The S&P 500 fell approximately 57%, but with that additional 4%, your money would have been depleted by over 60%, leaving you with less than 40% left. Farmers call that “eating your seed corn.” If you eat your seed corn, you've got nothing left to plant when growing season comes.
And there’s another problem: If you’re like most retirees, you probably wouldn’t have had 100% of your money in stocks. If you had a 60/40 stocks/bonds split, your actual rate of return for the stock allocation would have been closer to 2.4% over that 18-year period. And remember, you were still taking out 4% all that time, eating more and more of your seed corn. Never mind getting ahead — it would be tough to recoup even the initial investment under this scenario.
There’s an old expression: It's not how much you make that matters, it's how much you keep. If you want to keep more of your money, I believe that buy, hold and sell is a much better strategy than buy-hold. Using our buy, hold and sell strategy, we counseled our clients to sell in November of 2007 and stay out until June of 2009. I believe that buy, hold and sell can help you avoid losses during bear markets and protect the investments you need to live on during your retirement.
Some may say that I advocate timing the market. Nothing could be further from the truth. What I do advocate is that you consider a stop-loss order when investing. To do this, you would set a tolerable percentage loss below the previous high your investments reached, and sell when you reach that stop-loss point. Another great thing about a stop-loss: As your investments grow, your stop-loss point should rise along with them.
Watch for future articles where I will discuss how to set stop-losses (there are some things to be careful about, especially in volatile markets), where to consider putting your money once you have sold, and how to create a strategy for buying back into the market afterward.
* The rule of 72 is an equation that estimates the number of years required to double your money at a given annual rate of return.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Ken Moraif is the CEO and founder of Retirement Planners of America (RPOA), a Dallas-based wealth management and investment firm with over $3.58 billion in assets under management and serving 6,635 households in 48 states (as of Dec. 31, 2023).
-
The Surprising Truth About Loneliness and Longevity
We've all heard about the epidemic of loneliness that can shorten lives and make retirement miserable. But there's more to the story.
-
The Dollar Index Is Sliding. Is Your Portfolio Prepared?
The Dollar Index Is Sliding. Is Your Portfolio Prepared? The dollar's fall has been troubling because inflation appears to be constrained and the economy has been strong. Here's what it means for investors.
-
Seven Financial Considerations When Downsizing for Retirement
With prices going up on everything, you may be looking for a cheaper place to live. To truly evaluate costs, take a hard look at taxes and intangibles.
-
I Have Plenty of Money: Why Do I Need a Long-Term Care Plan?
Long-term care planning, whether through insurance or self-funding, is crucial not only for financial protection but also to preserve family relationships and reduce the emotional and logistical burdens on loved ones.
-
Three Steps for Evaluating a Downsize in Retirement: A Financial Planner's Guide
Unless you think things through, you could end up with major (and costly) regrets. To make the right choice, base it on the three keys to retirement happiness.
-
Worried About Your Retirement Income? Four Questions to Ask Yourself, From a Financial Planner
If you're nearing or in retirement and stressing about your retirement income (so many of us are), consider taking some time to think about these four issues.
-
Stock Market Today: Stocks Step Back From New Highs
Investors, traders and speculators continue the low-volume summer grind against now-familiar uncertainties.
-
Do You Need Flood Insurance? I'm an Insurance Expert, and Here's Where You Can Get It
Standard homeowners insurance does not cover flood damage, so you might need separate flood insurance, which you can get either through FEMA or private companies. Here are the details.
-
I'm an Investment Professional: These Are the Three Money Tips I'm Giving My College Grad
College grads can help set themselves up for financial independence by focusing on emergency savings, opting into a 401(k) at work (if it's offered) and disciplined, long-term investing.
-
Stock Market Today: S&P 500, Nasdaq Hit New Highs on Retail Sales Revival
Strong consumer spending and solid earnings for AI chipmaker Taiwan Semiconductor Manufacturing boosted the broad market.