After weeks of volatility, the S&P 500 is down nearly 32% from its February peak. For investors still decades away from retirement, this current bear market will eventually come to be remembered as just another downturn they have lived through. But for retirees or near-retirees, the market drop could mean the difference between a comfortable retirement or one marred by portfolio depletion.
If you’re on the cusp of retirement or have stopped working, here are the steps you should take to protect your nest egg.
Keep calm and hold on (to your investments)
The go-to instinct for many investors in the midst of a bear market will be to sell all their stocks before they lose even more value. That will be a mistake. Doing so will only lock in your losses and prevent you from reaping gains once the market recovers. Markets have always recovered from a downturn and selling now may mean missing out on the eventual market recovery.
For investors close to retirement age especially, exiting the stock market completely can introduce whole new sets of risks. Firstly, given that life expectancy in Singapore has increased to 84.8 years, there is a possibility that money kept in savings accounts and bonds may not last as long as you do, or grow enough to beat inflation. For a retirement that could stretch 25 to 30 years or more, stocks still offer the best chance of providing inflation-beating returns over the long term.
Liquidating stocks early in retirement can also subject your portfolio to sequencing risk. By selling stocks now when markets are down, you have to sell a greater amount of stocks just to come up with the same amount of money you could have gotten by selling less stocks in a better market.
When the stock market recovers, your portfolio reaps less of the market gains. And as you begin drawing down from your nest egg, this further compounds the fall because you will have even less capital invested to benefit from the recovery.
Not too late to focus on managing risk
According to research, a 17% portfolio loss at the start of retirement could result in an investor depleting their retirement savings 10 year earlier than expected. If you are near retirement or have just stopped working, the goal then should be to avoid big losses at this stage, with “big” of course being subjective.
The first step would be to ensure your portfolio risk level is aligned to your risk tolerance. For instance, you may have chosen a conventional portfolio of 60% stocks and 40% bonds. With the stellar performance of stocks right up to February, your portfolio could have shifted to a 75% stocks and 25% bonds allocation as stocks grew more in value compared to fixed income. Should markets tumble further, can you tolerate a 20% or even 30% fall in the stocks component of your portfolio?
One way to derive an asset allocation that can deliver dependable returns without the rollercoaster ride is to use a tool like Syfe’s risk questionnaire. It tells you your risk profile and suggests the ideal portfolio that matches your risk tolerance and financial needs for retirement.
In a falling market, Syfe’s automated risk managed investing strategy (ARI) kicks in to limit losses and cushion the impact of the drop on portfolio values. Amid rising market volatility, Syfe’s ARI algorithm re-optimised portfolios to keep portfolio risk in line with investors’ tolerance for risk. The result is a more resilient portfolio that experienced smaller dips in value compared to the benchmark and broader markets.
Build a cash cushion and seek trusted advice
While emergency savings of at least three to six months’ expenses are generally recommended, a larger emergency fund will offer more of a financial buffer. Experts recommend keeping money you’ll need for living expenses over the next five years or so in cash or short-term bonds. Rather than liquidate your stocks during this period, use your cash buffer and the cash you can get by selling your bonds to fund your expenses. This move also buys your stocks time to recover.
In these troubling times, panic is not an investment strategy. At this life stage, reacting emotionally to market drops can be especially fraught due to the relatively shorter time left to recover your losses. Good advice is key and a professional financial advisor can prevent you from making any rash moves.
Still unsure if you will benefit from expert advice? Consider scheduling a free consultation with Syfe’s financial advisors. They can provide you with an analysis of where you currently stand and help you update your retirement plan as market forces change.