Bear Market Retirement Strategies
Individual investors approaching or already in retirement
may be wondering how to survive the various challenges associated with the US
bear market conditions. A bear market refers to the state in which the prices
of securities fall 20% from recent highs, where market conditions remain
characterized by widespread pessimism as well as negative investor sentiment.
In the midst of volatile or bearish markets, investors should
transition their energy from worrying about asset devaluation to making
portfolio shifts that mitigate losses and execute investment strategies that
actually generate positive returns or cash flows. There are various retirement strategies that,
with the help of a qualified retirement financial advisor, help protect your
assets from large losses in a bear market. As a retiree or investor looking to
secure the income that supports your lifestyle, one may want to consider
implementing a tactical investment strategy capable of potentially shielding
assets from market volatility.
Planning & Executing a Retirement Investment Strategy
The process of implementing relevant or appropriate
strategies begins with identifying, understanding, and acknowledging causes of
a bear market. The determinants of bear markets cut across various
macro-economic conditions that often result in a sluggish economy. For example,
low employment, reduced business productivity and profits, low disposable
income, and market volatility as some initial indicators.
From a technical perspective, a market with the majority of
traded stocks on a downward trend is for that reason named a bear-market. A
more “technical” definition would be a drop of 20% or more in the Dow Jones
Industrial Average or S&P 500 throughout two (2) or more months. Below are strategies that could help weather
volatile bear market conditions.
Interventions by the government can also play a role in
triggering bear markets. For instance, significant changes (increases) made to
lending rates could lead to bear market conditions.
Retiring and change-oriented investors must remain focused
on different indicators, including high market valuations, geopolitical events,
low earnings growth, as well as rising interest rates. Below are investment options worth discussing
with a qualified financial advisor.
Retirement Options include Indexed Annuities, Partial Cash
Investments, Stop Loss Orders, Fixed Income Portfolios, Tactical Asset
Allocation, and Actively Trading.
Retirement Strategies
Indexed Annuities
Given the need for many retirees to have income generating
assets during volatile stock market conditions, fixed indexed annuities allow
investors to potentially generate higher yields linked to the performance of
the stock market, while at the same time, offering downside protection from
losses in principal.
Here is an example of how a fixed indexed annuity could
work: Let’s say the contract stipulate that the annuity provides a return of
50% of the SP500 on a yearly basis:
Despite their huge potential in enhancing the survivability
of investor portfolios during bear markets, critics argue that fixed indexed
annuities remain characterized by limits on returns. On the contrary, recent
and previous studies have so far established that investors, who invest in
fixed indexed annuities, are comfortable with giving up some upside to hedge
downside risk. According to the Wheaton Financial Institution Center:
Indexed Annuity returns have been competitive with
alternative portfolios of stocks and bonds and have limited downside risk
associated with declining markets. And they also have achieved respectable
returns in more robust equity markets.
Partial Investment in Cash
Apart from fixed indexed annuities, another reasonable
strategy involves selling overvalued securities in your portfolio. Although
this requires comprehensive analysis, its key benefit is having the cash to buy
higher yielding, lower risk investment or value equities as they become
cheaper, while at the same time, potentially protecting the investor’s
portfolio when faced with the declining market conditions.
However, the main danger associated with going partially
into cash is that a bear market may last many months (or in some parts of the
world for years). This creates
uncertainty for investors with cash in terms of when to get back into the
market. If not done at the right time
(too soon), this could expose the investor to the forthcoming bear market
pressures.
Investing Using Stop Loss Orders
Stop loss orders can play a pivotal role in protecting
portfolios in markets with increased downside risk. A stop loss order is often placed just below
the prevailing or current price. If the stock falls to the stated or
established price, the sale of the investment is done automatically. In this
way, as a retiree or investor, you enjoy the freedom of keeping your portfolio
until the stop loss is triggered. If the
market picks up without hitting the stop, your portfolio manager, at your
behest, can raise the stops so that additional profits are captured.
While they can be protection strategies, stop loss orders
are not 100% guaranteed that your stock will be sold at your stop price. That
is because the stop loss is a market order and will be executed at the first
available bid in the market. If the stock drops below the stop price, your
order may be executed at a lower price depending on market conditions and
liquidity in the stock or Exchange Traded Fund (ETF) position at the time.
Fixed Income Portfolio
Retirees and investors should look into conservative
investment strategies, given increased volatility and risks in the equity
market. They should consider tactical fixed-income strategies that support a
broader overall strategy. The reason for
investing in fixed-income investments would be to support withdrawal
distribution income and achieving tactical portfolio diversification.
Tactical Asset Allocation
Tactical asset allocation (TAA) serves as one of the best
possible investment tools to navigate the complicated and multifaceted full
market cycles. Sovereign Wealth Management’s, Gary Korolev, CFA, concurs that
TAA offers a broad range of opportunities, including potentially lower Maximum
Drawdowns, as well as higher likelihood of increased Compound yearly growth
rates across a bull-bear market cycle.
Additionally, another advantage associated with TAA involves
its rule-based, change-driven, and mechanical approach, which allows investors
to maintain market-oriented portfolios. TAA cuts risks as opposed to spreading
them across asset classes, which, in turn, minimizes the anxiety involved in
the whole process of portfolio management.
Tactical Asset Allocation combines an active management
strategy with the use of low-cost passive funds to potentially improve retiree
and investor income while reducing risk of large losses. There is significant amount of compelling
academic research supporting the use of TAA to manage part or all of an
investment portfolio. This approach can
also blend a diversified bond portfolio with a tactical stock ETF strategy to
provide a combination of steady income and stock market exposure with potential
for reduce downside risk.
Active Trading Strategy
Active trading is another strategic method that could allow
your retirement and investment portfolio to survive a bear market. According to
Gary Korolev, CFA, Principal Wealth Manager at Sovereign Wealth Management,
“the investment approach is not for every investor since there is a higher risk
of losing capital. What’s being recommended here is certainly not day
trading.” Rather, Active Trading refers
to:
Watching a particular security and trading it from point A
to point B and not caring if it goes further up. Most importantly, a trader has
to be willing to take losses if it doesn't work out right.
The benefits to this approach are higher rates of return on
your portfolio but that would have to be weighed against the risk of losing
your capital quite easily.
Trades can become long-term holds if they decline and you do
not have the discipline to take the loss. Also, investors can get greedy and
start to get in over their heads by trading too much too often. That is when
problems can happen and losses pile up quickly.
Quote Source: John Riley - Cornerstone Investment Services.
Conclusion
Volatile and/or Bear markets require retiree investors to
develop and implement the right strategies to prevent asset loss or devaluation.
Of the solution-oriented frameworks identified and briefly discussed in this
article, it is apparent that using TAA and fixed-income portfolio offers the
most sustainable solution to retirees during a bear market. The two strategies
place great emphasis on diversification, income growth and asset protection.
Originally Posted on Sovereign Wealth Management Blog
Originally Posted on Sovereign Wealth Management Blog
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The content provided is for informational purposes only and
should not be considered a recommendation of any particular strategy or
investment product or investing advice of any kind. Information contained
herein has been obtained from sources deemed reliable but Spire Wealth
Management, LLC and its affiliates do not guarantee its accuracy. The views and opinions expressed in this
article are those of the authors and do not necessarily reflect the opinions of
Spire Wealth Management LLC, Spire Securities LLC or its affiliates. Investing
involves risk, including the possible loss of principal.
