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How to Protect Your Portfolio in a Bear Market Thumbnail

How to Protect Your Portfolio in a Bear Market

Want to know how long the most recent, Coronavirus-induced bear market lasted? Just over a month! Was this a typical rebound? Certainly not!

Looking over the past century, the market took a year and a half to recover from a 30 percent decline. For instance, the ’08 crisis took 17 months to recover from the bear market lows. The dot-com boom and bust took nearly 2.5 years to recoup the losses.

Can your portfolio, and your income, survive a typical bear market?

There are three steps you can take to proactively survive a bear market: think long-term, choose low-cost and diversified investments, and stick to your plan. But there are mistakes you can avoid along the way as well. 

What Income Do You Need in Retirement?

The first step to successfully survive a bear market is to create a financial plan. But how does your investment kitty, built over decades, translate into sustainable income during your retirement? There are several ways to build retirement income, from bond laddering to guaranteed income to guardrails

We recommend retirees focus less on a single dollar figure as their main goal and instead look at it from the other direction: What will the money be used for? What are your annual expenses? Can you break them into core and discretionary? Do you want to leave a legacy to family? What other income or asset options can be used to help fund your retirement? 

With clarity on your needs and wants, then you can use rules of thumb, or more advanced calculators, to simulate the asset level needed to support your retirement lifestyle. This approach is akin to building the road, brick by brick, to get to your own retirement Oz.

You need to leave yourself a buffer, too. Healthcare costs in retirement are complicated to plan for. Many seniors erroneously assume they won’t have to pay for large outlays, like long-term care or assisted living, thinking Medicare will pay for that. But it doesn’t.

Review Your Asset Mix

Your portfolio should also be aligned to your risk tolerance and risk capacity. Review your asset allocation options and develop a portfolio based on your specific time horizon, needs, goals, and personal values. There are several online calculators or questionnaires to help inform you on how risky your portfolio should be.

By missing out on the market’s best days, you can lose out on important opportunities to grow your portfolio over the long-term. Market timing can have devastating results. For instance, six of the market’s ten best days occur within two weeks of its ten worst days. Further, a blend of stocks and bonds has not suffered a negative return over any five-year rolling period in the past 70 years. 

Even if you park your portfolio at the bank, you still are taking investment risk. If inflation averages 2 to 3 percent (a reasonable to conservative figure given current CPI rates), cash today will be worth half its value in 25 years. 

Keys to Investing Success

According to a Dalbar study, average investor returns over a 20-year period were only 2.6 percent, while a standard 60/40 stock/bond portfolio returned 6.4 percent. Why such a large discrepancy? The study attributes this difference in performance to badly timed — and likely emotionally driven — overtrading. Ignore the short-term agita and let the market work for your long-term goals. 

Allowing the markets to work for you over the long-term is important, but so is focusing on the fees you pay to stay invested. In fact, overpaying for your investments is almost as bad as overtrading your investments. Sales loads and expense ratios are an explicit drag on your long-term performance. Unfortunately, many times, these fees are hidden in the fine print of a fund prospectus. 

Diversification can help mitigate the risk and volatility in your portfolio, potentially reducing the number and severity of stomach-churning ups and downs. We recommend diversifying portfolios across a broad range of assets classes, geographies, sectors, and styles. 

Bear Market? Watch Out for These Mistakes

The markets will not always gently glide higher, and there will be periods of underperformance. It’s simply the nature of the game. It’s important, though, that you stick to your strategy and stay invested. A quote we use often is “It’s not timing the market, but time in the market, that matters.”

The 2010s were the first decade in American history without a recession. While many investors may be worried about the current market upheaval, volatility is a normal, necessary part of the market experience. Investors contend with a seemingly endless torrent of new economic, political, and technological change. Periods of large market moves — and market underperformance — will invariably happen. For instance, markets experienced double digit declines in 22 of the last 39 years, but they still managed to end in positive territory 75 percent of the time. 

Investors pay a heavy cost when their feelings dictate (often poorly timed) decisions. Following a plan can cut losses when markets are down and quicken recovery when markets turn around. A portfolio that included bonds saw reduced losses during the financial crisis, enabling these diversified portfolios to recover much faster than a portfolio of stocks alone. 

Investment Management with Harbor Crest Wealth Advisors

Investing through a bear market doesn’t need to be overly complicated. By following the principles laid out in this article, you can grow your portfolio and secure your future income needs. If you would like additional advice on how to determine the best way to build a portfolio that works for you in any investing climate, sign up for our newsletter.