EC Bear Market Awareness Checklist

It’s not too late to safeguard your portfolio. Some of the strongest counter-trend market bounces occur during bear markets, therefore you’ll be provided numerous opportunities to sell stock holdings at better prices. In addition, an all-or-none strategy to liquidate all stock holdings has proven to be ineffective. Consider maintaining 10-20% equity exposure throughout the cycle if possible.

Monitoring annual withdrawals and the willingness to alter them begins NOW.

Based on all the perilous narratives pervasive in the financial services industry, it may be a challenge for retirees to understand that a systematic withdrawal rate from variable assets requires surveillance and the willingness to make changes to preserve portfolio longevity. Lifetime, predictable income can only be safely derived from Social Security, pensions, immediate annuities, and as income riders applied to various types of annuities. In other words, volatile assets such as stocks require retirees to monitor annual withdrawals and take corrective actions if warranted.

James B. Sandidge, JD in his paper “Adaptive Distribution Theory,” for The Journal of Investment Consulting, describes The Butterfly Effect for retirees. The effect refers to the ability of small changes early on in a process that lead to significant impact later.

Depending on the length of this bear and damage incurred, systematic withdrawal rates may need to stay the same (do not increase cash flow requirements in any year during the first 5 that has a negative return) or reduced altogether.

In 2008-2010, I had distribution clients tap alternate sources of income including reverse mortgage lines of credit and policy loans against permanent life insurance policies. In 2011, we used portfolio gains to pay off these credit sources.

In January of this year, I adjusted returns down for every asset class (less for international and emerging markets), in our financial planning software. We’ve been having the discussion with newly-minted retirees that stocks may face a generational headwind along with heightened volatility and adjusting expectations accordingly. We examine rolling three-year portfolio withdrawals vs. overall portfolio progress and income production. One of our responsibilities is to make sure retirees in distribution mode understand the investment terrain and can adjust accordingly.

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Kurt Benson 5 months ago Member's comment

Good stuff, thanks.