Once again, the U.S. stock market is experiencing a bear market. That means the stock market is down at least 20 percent from its recent peak.  

What should you as a senior adult do in reaction to a bear market? If you are like most seniors, you own stocks either directly, in mutual funds or ETFs, or through your Individual Retirement Accounts, 401k, or similar retirement savings plans. Should you sell all of your stocks, reduce how much of your retirement portfolio is invested in stocks, or what?

For perspective, bear markets are common. We have experienced 17 bear markets since 1926. Historically, they occur once every 3.5 years and typically last for several months but sometimes much longer, according to statistical research conducted by Fidelity Investments. The last one occurred only two years ago, in 2020.

In other words, there’s no need for undue stress or panic when stocks drop. It’s part of the market’s natural rhythm. If you are a senior adult, you have lived through many bear markets in the past – and survived. 

Here are six reasons why retirees need not fear bear markets:

#1  Stocks Have Historically Proven To Be a Superior Long-term Investment

Stocks have historically outperformed nearly all other classes of investments. While you cannot predict future performance based on historical returns, it pays to study the past when trying to make rational investment decisions. With dividends reinvested, the annualized total return of the stock market (S&P 500) over the past 50 years (1972-2021) was 11.06 percent. These years included all the scary bear markets from our generation that we remember, including Black Friday (1987) and the 2007-2009 economic crash. Remember Y2K?

During that same 50-year time period, short-term investments (such as money-market accounts and Treasury bills) averaged 4.37 percent, long-term bonds (10-year Treasury bonds) averaged 6.60 percent, and real estate averaged 5.25 percent. This data is from research done by Aswath Damodaran, Ph.D, professor of finance at the Stern School of Business at New York University. If you are a finance nerd, you may enjoy diving into the professor’s extensive data.

These results help explain why most professional long-term investors commit a significant portion of their portfolios to stocks. Most pension plans, university endowments, and other professionally managed portfolios keep invested in stocks during both bull and bear markets, although portfolio managers will often adjust their mix of investments depending on their outlook for the immediate future. 

Retirees and those planning ahead for retirement should also consider owning stocks, although age, health, personal risk tolerance, and one’s overall financial status will affect what percent of one’s portfolio is appropriate to invest in stocks. The traditional formula is for an investor in his 60s is to invest 60 percent of his money in stocks and 40 percent in bonds and short-term securities, and then reduce stock exposure gradually as he ages. That may not be the optimum portfolio balance for you or me, but it is a commonly used yardstick.

#2  Most Retirement Investors Are Long-Term Investors

If you are recently retired or within your first decade of starting retirement, then you are by definition a long-term investor. According to the U.S. Centers for Disease Control, a man turning 65 today can expect to live, on average, to age 83, while a woman turning 65 will live, on average, to 86. About one in four 65-year-olds today will live to 90 or beyond, and one in 10 will live past age 95.

A new retiree today in their early or mid 60s should anticipate having money invested for at least another 20 years. That’s far too long to simply park the majority of your money in low-return “safe” short-term investments like bank CDs, fixed annuities, money market accounts, and Treasury bills. Your money needs to keep working hard for you to produce the income you will need during retirement and to offset the ravages of inflation.

As a retired investor, short-term gyrations in the stock market are not your greatest threat. What should really worry you is inflation, especially given today’s higher inflation rates. Stocks and real estate are the two major classes of investments that have proven best suited to fighting long-term inflation.

#3  Bear Markets Don’t Last Forever

Historically, bear markets have always been followed by a recovery in stock prices. While we cannot predict future results, we know that stocks have always recovered in the past, 100 percent of the time, even though in the most severe cases it took several years to do so. Part of the panic that occurs with a bear market is that we fear that somehow this time is different and that stocks won’t bounce back. People think like that during nearly every bear market. While that could happen, history suggests it probably will not.

#4  You ‘Lose Money’ in the Stock Market When You Sell At the Wrong Time

Related to reason #3 above, it’s important to note that you only “lose money” in the stock market if you panic and sell when prices are down. I can’t count how many people I’ve heard complain about how much money they “lost” in the 2007-2009 bear market. I’m hearing some of the same grumbling this year now that the market is down.

Do you want to know how much money I lost in the 2007-2009 bear market? Zero. Nada. None. While my portfolio was down in value temporarily like everyone else’s during that time period, I didn’t “lose” a penny. I didn’t panic and sell. In fact, my portfolio is worth far more now than it was just prior to the 2007-2009 downturn. Not to say I wasn’t concerned like everyone else, but I did what I have advised many clients in the past to do: Keep calm, stay invested, and have faith in the long-term strength of the private sector.

When you put emotion aside and think rationally, this approach makes sense. If you are a retirement investor with a long-term time horizon, why would you sell when prices are down? To the contrary, for those who have cash available and where owning more stocks is appropriate, bear markets represent an outstanding buying opportunity. Those who win big in the stock market are the ones who can swim against the stream of popular opinion and buy stocks while everyone else is selling. 

For investors who absolutely cannot stomach the ups and downs of the market and lose sleep over it during bear markets, at least wait until the next bull market and sell at more favorable prices. Don’t sell while prices remain low. Be aware, however, that getting out of stocks permanently will likely have negative consequences to your financial health. Your may experience lower long-term returns for your retirement savings. Your odds of keeping up with inflation will be diminished. 

#5  Time, Not Timing, is the Secret to Long-term Success

Some investors try to outsmart the stock market with a strategy called timing. The idea is that you sell your stocks when the market starts dropping and then put your money back in the market when it starts up. Sounds simple, right? In practice, however, this strategy doesn’t work consistently enough to make it a reliable one to follow. No one can reliably predict what the stock market will do next month or next year.

Another problem with trying to “time” the market is that most of the gains in the stock market occur in short bursts of frenzied buying, and not even famous investors like Warren Buffett can predict when these bull-market bursts will happen. If you don’t remain invested in the market, you will likely miss the next bull-market surge.

Don’t waste your time trying to time the ups and downs of the stock market. Don’t be fooled by some alleged guru who claims he can accurately and consistently time the market. There are plenty of them out there, eager to make money off of you. Rather, stay invested for the long term and be patient.

#6 Build a Retirement Portfolio Designed for Both Good and Bad Times

So what is a reasonable stock-investing strategy for the average retiree (or soon-to-be-retiree) when it comes to investing your retirement money? Follow the suggestions below to reduce the risk in your portfolio, earn a comfortable income from it, and be able to sleep better at night.

four tips for successful stock investing for senior adults:

1. Buy Quality

Not all stocks are the same in terms of risk and volatility. Remember, stocks are shares of ownership in companies. At this stage of life, most of us should not be speculating in trendy niches or buying emerging-growth stocks. Nor should we be trying to hit home runs. What we need are the slow and steady gainers, the proven companies, most of which are household names. To reduce your risk, only buy stocks of high-quality companies with a long track record of success. These are often referred to as “blue chip” stocks. Bear markets will come and go, but most of these companies are likely to perform well in the long run.

2. Diversify Broadly

A well-diversified portfolio is a safer portfolio. For a retirement portfolio designed for long-term success, you should diversify not only among a large number of high-quality stocks but also balance it appropriately to include a combination of stocks, bonds and short-term investments. Adding international diversification to your investment portfolio also makes sense in today’s world.

For most of us, this means buying into one or more mutual funds or ETFs because we lack the money and expertise to assemble and manage our own properly diversified and balanced portfolio. Owning only a handful of individual stocks is far riskier than owning a large basketful of stocks broadly diversified across all sectors of the economy. This is the primary benefit of owning mutual funds, ETFs, and other managed portfolios.

3. Seek Dividends 

Stock prices rise and fall, but did you know most companies continue to pay their quarterly dividends in good times and in bad? Another advantage of buying blue chip stocks is that most of them pay attractive dividends. Many of these blue-chip companies have managed to increase their dividends consistently, year-after-year, often even during bear markets.

Dividends paid to you from a well-diversified, high-quality stock portfolio offer you the best chance to receive a growing stream of income throughout retirement that can keep pace with inflation. Bonds, CDs and money-market accounts don’t have that potential.

If you invest wisely, you can look forward to receiving quarterly dividend checks in the mail (or deposited to your bank account) throughout your retirement years. 

4. Get Professional Help

Building and maintaining a good retirement portfolio that will serve you well for 20, 30 or more years is no easy task. It has always struck me as odd that many of the same people who won’t hesitate to consult a doctor for medical needs or take their car to the shop when it acts up will insist on trying to manage their money without professional help. We guys are the worst about not wanting to ask for help with managing our money. Perhaps it’s a macho thing, like not wanting to ask for directions when driving. When it comes to your retirement money, however, the stakes are high, so put aside the male ego and get professional help.

Investors should seek professional help from an experienced and objective financial advisor, such as a Certified Financial Planner. Not everyone who says he or she is a financial advisor is qualified to help you. Make sure you select one who’s practice focuses on retirement issues and who understands the needs and concerns of our age group. 

My advice would be to seek a fee-only financial planner who is acting in a fiduciary relationship on your behalf, not one who is compensated by commissions or other fees from investing your money. If the advisor seems to be overly eager to sell you a specific product, such as an annuity, be suspicious. There are many people who call themselves financial advisors but in reality are simply salespeople. 

Don’t hesitate to interview two or three advisors, especially if you don’t feel fully comfortable with the advice you receive from the first advisor you visit. It’s your money and your future.

Another benefit of having an investment advisor is that they can give advice without emotion. In a bear market, it’s normal to be more anxious about your money. This may lead to irrational decisions, such as selling all of your stocks. A good financial advisor can do what we in the business call “hand holding.” She can explain calmly and rationally why you need to stay invested.

Conclusion

Bear markets happen, but don’t let them spook you into not keeping an appropriate percentage of your retirement portfolio in stocks. Don’t let scary headlines about the stock market cause you to panic and sell your stocks at the wrong time. History tells us that stocks deserve a place in most people’s retirement portfolios, both while planning for retirement and during retirement.

Related Stories from This Retirement Life:

– Retirement Numbers You Need to Know

– Why Retirees Are Turning to Stocks for Higher Income

– REITs Offer Attractive Income for Retirees

copyright 2018-2022 by This Retirement Life

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