EC Bear Market Awareness Checklist

If you’re 25 and accumulating assets, I understand the ‘be bold to hold’ mentality although I disagree. Risk is risk. Risk knows no age. A favorable risk-reward profile in markets benefits all investors; a less favorable risk-reward scenario damages all.  The axiom that more risk portends greater returns is one of the most stalwart of financial industry myths. At 65 years-old and in distribution mode, a 20% loss along with the recommended withdrawal rate of 4% creates a scenario which places long-term financial security and future cash flows in jeopardy.

So, for those in retirement or seeking to retire within the next five years, here is your bear market three-point awareness list:

Inflation isn’t your greatest threat; principal erosion is the enemy.

Inflation gets cast as the eternal villain in your retirement plan. It’s a ruse. The inflation boogeyman’s motive from a financial industry perspective is to maintain portfolios over-allocated to stocks just to collect managed account fees.

Academic studies coupled with personal experiences with clients who have been in distribution phase for two decades, have encouraged me to dig deeper and chronicle retiree spending habits. I have yet to encounter a retiree who requests every year an increase in distributions by the rate of inflation. Sure, lump-sum withdrawals are taken for large expenditures like new automobiles or big trips, especially during market periods such as last year when significant profits were taken. I’ve coined this spending outside of day-to-day expenses as “bonus spending.” Unlike recreating a paycheck in retirement to take care of everyday needs, the big expenditures occur when stock allocations prosper, and profits are harvested.

If you must pick a sword to fall upon during bear markets, don’t fret over inflation. Fret over eroding principal. Bleed a little over 2% inflation, or watch wealth hemorrhage if you follow dangerous and popular financial dogma such as “sit tight” or “they’re only losses on paper.” Do the math. Trust your gut. The bear market of 2007-2009 saw the stock market drop 57% in 17 months. Bear market price declines average 43%.

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Kurt Benson 5 months ago Member's comment

Good stuff, thanks.