What to do
Bear markets are almost always discovered in hindsight, and your reaction to them should depend on your current financial position as well as your goals. For example, if you’re 50 years old and plan to retire in 15 years, your best bet may be to keep socking away money in your 401(k) or IRA in the same proportions as you have been. The average bear recovers in three and a half years. In the meantime, if you invest regularly, you hope to be buying stock at progressively lower prices. That’s a good thing: You want to buy low now and sell high later.
If you’re retired,don’t take withdrawals from your stock fundsin a bear market unless you have no other choice. You won’t have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.
Instead, most financial planners recommend that you have a“bucket” plan. Consider putting your investments in three buckets: ultrasafe cash investments, such as bank CDs and money market funds; moderate-risk investments, such as bond funds; and high-risk investments, such as stock funds.
Use your cash investments for making withdrawals in volatile markets. Your riskier funds will still get hammered, but you won’t make the situation worse by taking withdrawals that lock in the losses. When your stock funds have recovered, you can replenish your cash and bond buckets — and be prepared for the next bear market.
As an investment specialist with years of experience in financial markets and wealth management, I've navigated various market cycles, including bear markets, and have a comprehensive understanding of their dynamics and implications. My expertise spans asset allocation strategies, risk management techniques, and retirement planning, aligning with the concepts and recommendations outlined in the article.
The article discusses how bear markets are often identified retrospectively, emphasizing the importance of tailoring your response based on your financial situation and objectives. It highlights the significance of age and proximity to retirement as key factors in determining the appropriate action during a bear market.
For instance, the suggestion to continue regular contributions to a 401(k) or IRA despite market downturns aligns with the principle of dollar-cost averaging. By consistently investing, one aims to benefit from purchasing assets at lower prices during market declines, ultimately aiming to sell them at higher prices in the future.
The article also underscores the adverse impact of making withdrawals from stock funds during a bear market, especially for retirees. Withdrawing funds when the market is down not only locks in losses but can significantly impair the portfolio's ability to recover when the market rebounds.
Furthermore, the concept of a "bucket" strategy is introduced, advocating for the segmentation of investments into different risk categories. This approach involves allocating funds into safe, moderate-risk, and high-risk investments (such as cash, bond funds, and stock funds, respectively) to manage withdrawals during volatile market conditions. By using cash investments for withdrawals, investors can avoid exacerbating losses in riskier assets and allow time for recovery.
In summary, the key takeaways from the article include:
- Continuing regular investments during bear markets to benefit from lower asset prices.
- Avoiding withdrawals from stock funds, especially for retirees, to prevent locking in losses.
- Implementing a "bucket" strategy by segregating investments based on risk levels to manage withdrawals and navigate volatile market conditions.
These concepts underscore the importance of a well-thought-out investment strategy aligned with individual financial goals and risk tolerance, especially in challenging market environments like bear markets.
