There are two types of markets: bull and bear. Generally, when the market rises by 20% from its most recent low, it's a bull market. And when the market drops by 20% from its most recent high, it's a bear market. While everyone loves the market when the bulls are running, bears are far less popular.
In fact, a 20% drop is enough to make some investors cash out their portfolios and run for the hills. Fear is natural, but if there's one thing that can overcome fear, it's preparation.
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Preparing for a bear market as a retiree
If you've never once heard someone say, "I really enjoy a good bear market," it may be because no one has. There's nothing enjoyable about watching your assets decline in value or not knowing for sure how long it will take for the market to rebound.
What helps is knowing that a bear market will occur. It's a matter of what you do in the meantime to prepare. In fact, preparing for the next bear market should be a part of your overall retirement plan, even if you've already clocked out of work for good.
Here's what retirees should know about surviving -- and thriving -- when the next bear market hits.
Your first move should be to block out the noise
It's important to note that bear markets are typically driven by fear. Investors get itchy because of what they hear on the news. The political landscape may scare them, or the constant coverage of dozens of wars may make them anxious. They may be so sure that an economic downturn is ahead that they create one by pulling out of the market. And once a small group of investors leaves the market, others fear that those people know something they don't, and they do the same.
As uncomfortable as you may feel in the moment, block out the noise long enough to focus on what's real. Expose yourself only to stock market reporting, and if you have an advisor, trust that person to inform you of what you need to know. As a human, you're wired to pay more attention to scary news than happy news. It's how humanity protects itself. News (and quasi-news) organizations know that, and because they profit from your fear, they ratchet up the doomsday talk when the market is depressed.
It's easier to block them out when you know you're being manipulated.
According to Hartford Fund statistics, a person who invests for 50 years can expect to live through roughly 14 bear markets. Historically, each bear market has been followed by a robust bull market, serving as a reminder that bear markets are a temporary part of the process.
What if the market drops by 20% or more?
The market will drop by 20% or more at some point. It's part of the economic cycle. But when it does, you can be ready. Here's how:
- Build a cash cushion: When the market is roaring along like a freight train, take the opportunity to add to a cash cushion you can draw from when the market is in hibernation. Since you'll want the cash to be liquid, consider building your cushion in a high-yield savings or money market account (MMA). It's during bear markets that asset values drop, and you must sell more to net the same amount of money.
- Postpone non-essentials: If your furnace breaks down during a bear market, you'll need to have it repaired. However, if possible, postpone any non-essential purchases. Again, if you've spent years building a retirement account, the goal is to leave as many assets as possible to grow as the market recovers.
- Review your asset allocation: Double-checking that your portfolio is appropriately balanced is a constructive way to do something during the bear market. It may also be a very good time to meet with a financial advisor to ensure that you're making moves that fit your long-term goals and risk tolerance.
No one needs to tell you that bear markets aren't fun. However, they are natural. Better yet, they tend to be short-lived compared to bull markets. Whereas the average length of a bear market is about 9.6 months, the average bull market runs for around 2.7 years. Time is definitely on your side.
