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The Bear Market: What Financial Advisers Are Telling Retirees

Most professional investing advice starts with a warning: Don't panic

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Steve Janachowski, a financial planner in Mill Valley, California, got a text from his aunt at midnight Wednesday. “Can you sell everything and put it in bonds or gold?” it read.

Janachowski, who manages her account, texted back: “No, don't do that."

"When people get older, they get scarcity conscious,” Janachowski says. “They always think they don't have enough, even when they do, and they have to realize this is a temporary situation."

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If you're retired, the biggest danger in a stock market downturn can be panic. Financial advisers say that the best thing to do now is take some time, think honestly about your tolerance for risk, and review your overall retirement plan. If you were happy with your portfolio two months ago, you probably will be again — although perhaps with a few tweaks.

No one knew it at the time, but the bull market in the Dow Jones industrial average ended on Feb. 12, when the blue-chip index closed at 29,551.42. The next day, the Dow began a slide that, as of March 11, registered a 20 percent loss. (Stocks fell even further on Thursday.) Other major stock indexes, such as the Standard & Poor's 500, are in bear-market territory, too, traditionally defined as a loss of 20 percent or more.

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It's hard to stay calm, particularly in such a rapid market decline — the fastest 20 percent fall since World War II, according to Sam Stovall, chief investment officer for research firm CFRA. The spread of COVID-19, the disease caused by the novel coronavirus, makes it even harder to stay calm. But that's what experts recommend, because otherwise you could sell your stocks at the bottom of the market and lock in those losses.

If you're glued to your computer screen and watching the carnage, stop. Take a walk. Talk to your family. Pet the dog. “Take a deep breath,” says Gary Schatsky, a New York financial planner. “Take some time to evaluate your financial house.”

Financial planners take three things into consideration when evaluating a client's financial standing: risk tolerance, time and goals. You can, too.

1. Risk tolerance

After 11 years of rising stock prices, you've probably downplayed risk. “People become complacent with a rising market,” Schatsky says. A bear market makes you reconsider your risk tolerance. If you haven't been able to sleep the past week, then you need to think about whether you should continue to keep as much in stocks as you did.

But be careful. You're probably not entirely rational when the stock market is falling, either. One way to combat your fear is to look at your entire portfolio — stocks, bonds and cash. Stocks get all the headlines, but few people keep 100 percent of a retirement portfolio in stocks. Your total losses are probably less than the S&P 500's losses. As of Wednesday, the S&P 500 had fallen 14.8 percent for 2020, including reinvested dividends. The S&P 500 Bond index, however, has gained 1.4 percent. A portfolio consisting of 50 percent stocks and 50 percent bonds would be down about 6.7 percent — no fun, but not as bad as you might suspect from the headlines.

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If you are still terrified, then consider making some changes when the markets stabilize and rebound — which they will, eventually. For example, if you have stocks in a taxable account that are now in the red, you can sell those stocks and take advantage of the tax code to soothe your losses. You can use capital losses to offset capital gains, and if you still have losses left over, you can carry those into the following tax year. “Take this crate of lemons and make lemonade,” Schatsky says.

If you've been light on stocks, this might be the time to nibble at large, high-quality companies or funds that invest in them, says Malcolm Makin, a financial planner in Westerly, Rhode Island. “Strong companies will recover first,” he says. “Compromised sectors, such as airlines, will be bargains, but it will take some time for them to recover.”

2. Time

As the Securities and Exchange Commission will remind you, past performance is no guarantee of future returns. Nevertheless, the faster markets fall, the more quickly they tend to recover. “The prior bear markets that hit the minus 20 percent level quicker than the average 270 days not only bottomed most rapidly but also recorded the shallowest declines, averaging a loss of 26 percent versus the average drop of 33 percent for all bear markets,” says Stovall.

Bear markets driven by unexpected events, such as a viral outbreak or a military attack, tend to be shorter and less severe than those driven by systemic failures, such as bank failures, according to Goldman Sachs. Systemic bear markets, such as the 2007-2009 bear, average a soul-searing 57 percent loss. Event-driven bears average a 29 percent loss, last about half a year and recover within a year.

If you're taking out money from your portfolio for your living expenses — or because of required minimum distributions, or RMDs — try not to take it from your stock portfolio. Selling just aggravates your losses. If your stocks are down 10 percent and you withdraw 5 percent, your account is down 15 percent. The more time you give your stock portfolio, the greater chance you have that you'll recoup your losses. If you have to take withdrawals from your portfolio, “take them from your money market fund first and bonds next,” Janachowski says. “Don't sell stocks.”

3. Goals

"Remember, your real risk is not short-term market volatility, but having enough resources to last you the rest of your life,” says Harold Evensky, a financial planner in Coral Gables, Florida. “Moving your investments to cash may sound safe, but placing it all in cash or a money market account that earns little and is eroded by inflation is certainly not safe.”

If you were thinking of using your stock profits for a vacation this year, you might have to rethink that goal until markets recover. Given the number of restrictions on travel because of the coronavirus, you may have to do that anyway. It's probably better to cut back on unnecessary expenditures than overspend your retirement account.

One way to ensure your portfolio outlives you is to develop a pool of safe, liquid investments that you can tap when the stock market is in free fall. “Retirees should have at least 40 percent of their investment portfolios in fixed assets, such as investment-grade bonds, Treasury securities or cash,” says Makin. “If they have that, they should be able to get through the next few months without having to sell equities or real estate."

You can build your pool of liquid money gradually — for example, by having stock dividends directed to your money market account, or by selling some stocks for tax losses, if that's possible. Given the recent drop in interest rates, you might be able to raise some cash by refinancing your home and tapping the equity to build your cushion. But as the stock market revives, make sure you make plans for the next bull market — and the bear that will follow.

Bad times don't last forever. “I was 11 years old when Jonas Salk created the first polio vaccine in 1955,” Makin says. “I saw classmates with polio. I saw the results of polio. The world figured it out eventually, but it was beyond scary.” But that was 65 years ago, he notes, and science has advanced. The coronavirus will eventually be defeated — sooner rather than later, hopefully. In the meantime, don't panic.

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