Bear markets are especially hard during retirement. The data supports that if a bear market occurs shortly before or after retirement a typical retirement plan can be blown. This is referred to as Sequence of Return Risk and it proves how detrimental a bear market can be near retirement.
In this article I’ll share:
- Why most investors don’t try to avoid bear markets even in retirement
- 4 ways to avoid substantial bear market downfalls in retirement
- The pros and cons of each bear market risk management strategy here
- The strategy I personally use to avoid or at least limit bear markets
Note that these solutions either can avoid bear markets altogether or improve inevitable bear market declines.
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Is It Possible to Avoid Bear Markets in Retirement?
It is possible to avoid a bear market in retirement but there is a price to pay as you’ll see.
As crazy as this might sound, let me explain most investors do not have a goal of avoiding bear markets, and here’s why: Most investing is based on buying and holding different assets that are expected to move inversely during bear markets. This approach is called strategic investing, and it buys and holds these various types of “noncorrelated” investments.
This might sound complicated, but it’s fairly simple. One way to put it is that different assets, like stocks and bonds, are owned with the expectation that these assets will move in opposite directions as the different assets move up or down due to changing economic environments.
Stay with me because it’s important to understand why most people don’t even try to avoid a bear market in retirement in understanding the ways you can limit or avoid bear markets in retirement.
So, the asset that is most commonly held with an expectation it will increase in value during a stock bear market is bonds.
Unfortunately, however, bonds do not always move opposite stocks. The reality is that before the 1990s decade, stocks and bonds moved in the same direction more often than they moved in the opposite direction as you can see from the image below.
Investors with strategic, buy and hold portfolios got a taste of this stock-bond price movement correlation in 2022 when stocks and bonds declined in unison.
Most investors haven’t even attempted to avoid bear markets for the reasons explained above; they invest with the intention of the assets they own offsetting bear market declines in their portfolio, so why try to avoid bear markets since they are a fact of life for stock investors?
Then some investors began to question whether strategic (buy and hold) portfolios made sense or whether they should consider a different investing strategy that would avoid or reduce the risk from major bear markets like those we saw in the early 2000s decade. These bear markets were much worse than the short and sweet little bear markets we saw in the late 2010s decade.
For example, the then popular tech heavy NASDAQ dropped over 72% in the early tech bear markets!
The S&P 500 declined about 55% in the 2007-2009 bear market.
I do not know if there will be a terrible bear market in the near term or if we’ll continue to have increasing stock markets over the next few years.
My inkling is that there will be at some point, but no one knows for sure when.
Experts who are way smarter than me give compelling reasons for both possibilities over the next year.
I do know however as an older, officially retired investor I do not like “riding out bear markets” as is usually suggested by financial experts.
The fact is that bear markets can be detrimental to retirement savings, even when bonds are owned to “manage the risk” since this doesn’t always work to keep our portfolios safe as the data above reveals.
This realization led me to an obsession with researching ways to avoid bear markets over the past fifteen years.
Here are the most common ways to avoid a bear market in retirement while not permanently avoiding the stock market since it’s good to own assets, like stocks, that have growth potential.
1. Avoid bear markets by not investing in stocks
Some investors decide to avoid the stock market altogether for at least a period of time, particularly after experiencing a severe bear market.
You avoid bear markets.
Your retirement savings may not grow but you can invest in assets besides stocks that present growth opportunities as addressed later in this article
You will have to do something else that requires more effort or time. The reality is that plopping money into the stock market is easy with index funds and ETFs; doing something different takes more effort.
2. Invest in a product with a guaranteed return
Some investment and insurance products help investors avoid bear markets, especially in retirement.
They reduce risk related to bear markets.
You get a “guaranteed return’ as long as the company providing the guaranteed return stays in business.
You get lower returns. Reducing risk is not free, much like taking out an insurance policy on your home or car comes at a cost.
Product fees eat into returns.
3. Use options to manage bear market risk
Some investors and financial advisors buy put options to offset stock market risk.
This method doesn’t necessarily avoid a bear market. In general, however, put options increase in price during bear markets; this increase offsets bear market declines.
Put options can offset bear market declines.
There is a cost to buying put options.
There is a learning curve to using options properly.
The timing and strike price for option strategies can be difficult to get just right.
4. Tactical investing
Many advanced investors and financial advisors choose tactical vs strategic investing.
Tactical investing methods rotate out of stocks near the beginning of bear markets and rotate into cash or other assets expected to perform well.
On the other hand, strategic investing buys and holds set percentages of asset classes, such as stocks and bonds, regardless of market movements.
While tactical investing sounds sensible, there are pros and cons.
You can avoid being in a bear market for at least the full duration.
It takes more effort to rotate assets than to always keep the same percentages in stocks, bonds, and other assets.
Rotating assets can trigger higher taxes.
My Favorite Way to Avoid Bear Markets
After over 40 years of investing, I’ve found the best way to avoid bear markets in retirement is to invest using a tactical strategy that rotates in and out of assets based on certain criteria. This sounds time consuming, but it takes me about an hour a month to do this in several retirement accounts and a regular account.
Let me explain.
I don’t use my own ideas to try to outguess market moves. Instead, I use strategies that well known financial professionals and companies have developed that show me when long term trends are changing so I know when to rotate in or out of stocks, bonds, and other assets.
How do I do this?
As previously written, I became determined to lessen or avoid bear markets altogether after the 2000s decade. This led me to research multiple tactical strategies from various experts, authors, and organizations over the years. The best tactical strategies I’ve found so far are on AllocateSmartly.com.
I use Allocate Smartly to help me analyze and implement the strategies I like the most based on risk and return as explained in my Allocate Smartly review.
Note: I became an affiliate for Allocate Smartly after using it for over a year and loving it. As a way of saying thanks, I provide free video training to get started for those who purchase using my Allocate Smartly affiliate link.