retirement

On the Cusp of a Market Downturn? What to Do (and Not Do) When Retiring

Anyone nearing retirement needs to invest like they drive: Defensively. Here's how to do that.

No one knows how much life is left in our growth economy and the bull market. So, a common question is being asked by people nearing retirement is, how can I retire not knowing what’s around the corner?

Just like approaching a blind curve on a windy road, you need to prepare not only in the moments immediately prior these turns, but well in advance of them.

Follow the Map

If you’ve saved enough money to retire, chances are you’ve been following a long-term investment plan. That is already the best thing you can do to survive market trouble. Now, it’s a matter of sticking with it.

When markets fall, however, there’s a natural tendency to want to do something. Here’s why most people shouldn’t.

If you have an investment plan put together with the help of an adviser, then it was likely stress-tested via a Monte Carlo analysis, which runs your investments through hundreds of possibilities based on market history. It essentially gives you the probability for your plan’s success. This way, you’ll already know that you can make it through a major market crash with little more than a few bruises. That is, as long as you stay the course. When this is the case, knee-jerk reactions may do more harm than good.

Be a Defensive Driver

As you’re nearing retirement, you’ve hopefully dialed back on the overall risk throughout your portfolio. Being overweighted in mid-cap growth stocks may have paid you handsomely in recent years, but owning a diversified portfolio that includes less-risky investments, like bonds, will act as an air bag in case of a stock market accident.

Many investors near retirement want to hold on to their growing stocks for just a little longer. That can often work against them. If you’ve enjoyed healthy returns, lock in some of those gains and lower your risk by selling and diversifying.

Additionally, always keep cash at hand for emergencies. Having the money to cover three to six months’ worth of expenses plus an additional $5,000 for life’s minor accidents can help keep you from having to sell investments in a downturn.

Don’t Try to Time the Light

All investors presumably know that buying high and selling low locks in losses, which is something they should steer clear of. But when stocks drop, that’s what most do when they hope to stop the bleeding. The desire is to sell before the market hits bottom. What usually happens is that when an investor is finally worried enough to cash out, the market is already near or at the bottom.

To beat the market, you must be right twice. You have to get out before major losses occur and get back in before the rebound starts. The odds of you pulling this off are minimal because the big gains of a rebound tend to happen sooner than investors’ nervousness wanes. In fact, stock returns are typically greater immediately after market losses. In the last 90 years, the average one-year return after a drop of 15% or more in the S&P 500 is 55%.

This isn’t to say that you can’t make any changes to your portfolio. Modest shifts in the types of securities you own may help to minimize volatility while still leaving you invested and able to enjoy the eventual recovery. Therefore, review your portfolio to determine if you’re invested too heavily in one sector and rebalance, if necessary. That will return your portfolio to your desired asset allocation. If you were well-diversified prior to the downturn, then small adjustments, if any, might be all that you need.

Watch Your Speed

In the meantime, if you’re already taking income from your savings, consider reducing the amount of your distributions, as long as your necessary expenses are covered. Further, cut back on spending or at least delay major purchases until the markets recover some of their losses. Making many small expense cuts is just as fruitful as one or two big ones, and they won’t dramatically alter your lifestyle. Think about vacationing closer to home, eating out less or minimizing any unessential home improvements.

Most of all, remember that you’re a long-term investor. As we step back and look at history, we know that stocks have recovered 100% of the time. Riding out the storm will keep you moving forward as an investor.

About the Author

Sean McDonnell, CFP®

Financial Adviser, Advance Capital Management

Sean McDonnell, CFP®, is a financial adviser at Advance Capital Management, an independent registered investment adviser based in Southfield, Mich. He works closely with clients to create and implement customized financial plans, as well as provides a wide range of services, including: investment and 401(k) management, retirement planning and tax strategies.

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