What to Do About a Market Meltdown: Part One

Protecting Your Retirement Savings

For many people, the short term pain of watching the value of their retirement savings drop during a recession or bear market can give them a reason to question the validity of investing in the capital markets. No one seems to mind when things are going well, which is typically during an economic expansion or lengthy bull market. Maybe you’ve had the opportunity to experience one yourself and how a period of exceptionally high annual returns can accelerate the growth of your investment portfolio. On the other hand, a down market, characterized by a bear market or recession, provides a reality check and an opportunity to revisit your long-term goals. For some people, however, a decline in the market can seriously affect their ability to maintain their chosen lifestyle.

For example, a declining stock market resulting in short term losses during the first few years of a distribution (retirement) portfolio can destroy a retirement plan. A distribution portfolio is a portfolio where there are periodic withdrawals and no cash flows in. When there are no cash flows into a portfolio, short-term losses can cut the portfolio lifespan dramatically. In many cases, short-term losses can cut the portfolio lifespan in half, which means you would need significantly higher gains (returns) in the future to recover from those losses.

The fact of the matter is, it is not so much about historical averages or what the market will or will not do. Market conditions and the economic environment change over time and stock market volatility is an inevitable part of investing. In the distribution phase, it is more about designing a portfolio that will account for the sequence of returns and fluctuations in the value of your portfolio.

If you have prepared an investment plan that will account for fluctuations in the value of your portfolio as described in Chapter 7 of my book, then you should not be unduly concerned. Nor should you overreact by abandoning your long-term plan. Overreacting to a market meltdown or recession by changing the composition of your portfolio could seriously hamper your ability to achieve your goals.

For those who have experienced a lengthy bear market or recession in previous years, let me ask you a question. What happened afterwards? If you remember the last bear market or recession, then you should know that our economy has always recovered. What did you do during the last market decline? Did you abandon your long-term investment plan?