Right Now Is the Right Time to Prepare for the Next Bear Market

No one knows exactly when the next bear market will blow through the nation’s nest eggs.

Jim Cramer, Jean Chatzky and Suze Orman won’t show up in your town wearing matching windbreakers the way the Weather Channel team does when a storm is on the horizon. By the time you realize what’s happening to your portfolio, it’s unlikely you’ll have a chance to get out or do much to protect your investments.

The best time to prepare for a bear market is when a bull market has run for many years and the market is near record highs.

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You know, like right now.

I know that’s easier said than done.

We’ve been enjoying the benefits of this bull run for more than eight years now. Which means it keeps getting harder to remember what happened in 2000 and 2008, and it keeps getting easier to put off making any changes that could rein in your current returns.

But if you’re only two or three years from retirement, you simply can’t be complacent. You can’t afford to lose sight of the amount of risk in your portfolio — or what could happen to the long-term goals those investments are there to help you attain.

If you have most of your money in the market, it’s time to take a look at your age and your asset allocation and do a reality check.

The Rule of 100 is good place to start. You just subtract your age from 100 and invest the remaining number in equities. So, for example, a typical 60-year-old would keep 40% of his or her portfolio in stocks and the rest would be in safer assets.

It’s not a set-in-stone answer, of course. You have to consider your risk tolerance, your income needs, your lifestyle goals, your family dynamics and other factors. But it will give you some idea of where you should be.

Income is everything in retirement, so it should be your priority in planning. You should have a good idea of how much you’ll need and where it’s going to come from. If you have a pension coming, and/or generous Social Security benefits, you may have a little more flexibility. You could leave a bit more money in your risk bucket with the goal of harvesting more gains when the market is up. But if most of your income is coming from your investment accounts, you have to take a couple of things into consideration:

• If it’s a tax-deferred retirement account (such as a 401(k) or 403(b)), a portion of that money actually belongs to Uncle Sam. (And sooner or later, he will come to collect — you can count on it.)
• You can’t expect or depend on your money to keep growing at the rate it is right now for the next 20 to 30 years. Those rates will always fluctuate, affecting the amount you can safely withdraw.

So, if you’re looking for less risk and more safety, where can you invest without losing out to inflation?

A lot of investors go for mutual funds — and there are even a few, such as the Grizzly Short Fund (ticker: GRZZX (opens in new tab)) and the Federated Prudent Bear Fund (BEARX (opens in new tab)), that are built to profit in a down market.

But if you’d prefer something less aggressive (and finicky) you may want to look at sturdy, recession-resistant, port-in-the-storm U.S. companies that are dividend payers. Those payments can help offset some of your losses if there is a downturn — and you might even use them to buy more shares while the price is right.

A word of warning: It can be stressful and costly to try to time the market. No one can predict with 100% accuracy why or when it will rise or fall.

Instead of focusing on the turbulence, listening to the what-ifs and making decisions based on emotions, put your energy into shoring up a retirement plan that will help you ride out the markets’ stormiest days — and every day through retirement.

Kim Franke-Folstad contributed to this article.