How to Retire During a Volatile Stock Market

Posted by Richard on December 5, 2017

After a long stretch of calm and a relentless rally, the stock market could be headed for trouble. Stock market corrections, typically defined as a loss between 10% and 20% from the peak, occur about every two years, on average. The last one began in May 2015, so we’re due. The S&P 500 trades at about 24 times corporate earnings for the past 12 months, more expensive than the market has been 90% of the time since 1928, says Jim Stack, president of InvesTech Research and Stack Financial Management. “This is one of the more overvalued markets in history,” he says. “It carries a high degree of risk.”

When a market is ready to correct, it will seize on a trigger — and this market has plenty to choose from. Worries include the lingering effects of Hurricane Harvey, the threat of a government shutdown if the federal borrowing limit isn’t increased and escalating nuclear tensions with North Korea. Of the 21 corrections since World War II, nine of them began in September, October or November. Whatever the cause, any market drop is particularly worrisome for retirees and near-retirees, who have less time to make up for losses. Here are seven tips to help you survive any turmoil.

One of the important lessons from the devastating 2007-09 downturn is that even in the worst of times, “recoveries happen within a reasonable period,” says financial planner Cicily Maton, of Aequus Wealth Management Resources, in Chicago. Since 1945, it has taken an average of just four months to recover from market declines of 10% to 20%. Bear markets (resulting in losses of 20% or more) have taken an average of 25 months to break even. Fight the urge to cut and run, and avoid selling your depreciated stocks, if you can. If you are in your seventies, remember that you have until December 31 to take required minimum distributions from your retirement accounts.

Keep Your Portfolio on Track

Even retirees should have an investment horizon long enough to weather this storm or whatever the market can dish out. For a retirement that can last decades, T. Rowe Price recommends that new retirees keep 40% to 60% of their assets in stocks. And because stocks stand up to inflation better than bonds and cash over time, even 90-year-olds should keep at least 20% of their assets in stocks.

If you’ve been regularly monitoring your portfolio, you’ve already been cutting back on stocks periodically over the past few years. Now is a particularly good time to revisit your investment mix to ensure that it is consistent with your tolerance for risk. During the bull market, “people were getting comfortable with those returns and may have let their stock allocation drift higher,” says Maria Bruno, a senior investment strategist at Vanguard. “We’ve been reminding them to rebalance.”

Make Sure You’re Diversified

When stock prices are being pummeled, bonds are often pushed higher by investors seeking a safe place to hide. In general, investors should own a mix of domestic and foreign bonds and U.S. and overseas stocks. And within the stock allocation, you should have a variety of market sectors. No single sector should claim more than 5% to 10% of your holdings, says T. Rowe Price senior financial planner Judith Ward.

Also remember that the headlines are not about you, says Ward. Retirees, especially, are likely to have a healthy mix of bonds and cash in their accounts to temper stock market declines. The market is not a monolith, and some of your stock holdings may buck the downtrend.

Stick With High-Quality Holdings

This is no time to speculate. Look for companies with dependable earnings, impeccable balance sheets and healthy dividends, or funds that invest in such companies. T. Rowe Price Dividend Growth (symbol PRDGX) — a member of the Kiplinger 25, the list of our favorite no-load mutual funds — delivers steady returns with below-average volatility by focusing on sturdy companies that dominate their businesses and pay out reliable and rising dividends. PowerShares S&P 500 Low Volatility Portfolio (SPLV) is a good choice for exchange-traded fund investors.

By: Anne Kates Smith, Senior Editor, Kiplinger & Jane Bennett Clark, Senior Editor, Kiplinger