BEARS AND BULLS…PREPARING FOR THE NEXT RECESSION.
The stock market has experienced a pretty good run the past five years. The Dow Jones Industrial Average is up 57%. A bear market occurs approximately every 5 years. The average decline is 39% with a duration of 1.5 years. The average time to break even is 5.2 years.
A CHAIN REACTION. The concern with a bear market during retirement is that your assets could lose value. If that causes you to tap into your portfolio for income to cover living expenses, you may risk taking valuable cards off the table when the market steadies.
So, what if you are not retired? It doesn’t affect your current income, but it is a setback in the future growth of your retirement plan. Maybe you are planning on retiring in 5 or 6 years and are looking forward to another 50 or 60 percent growth and your retirement assets are really going to finance your retirement dreams. Suddenly there is a 39% downward adjustment in the market. If history repeats itself, you are looking a five to seven years to get back to where you are today and the future appreciation you were expecting and depending on have vanished.
I don’t know what to expect from the market. I know that it goes up and it goes down. In a recent poll 34% of the economists predict that a slowing economy will veer into a recession in 2021, up from 25% in February. What’s more, another 38% expect it to occur in 2020. The New York Federal Reserve puts the probability of a recession with a year above 30%.
If your retirement assets are at risk in the market, it may be time to brace yourself and take steps to prepare for the next recession.
If your company 401(k) plan is invested in your employer’s own stock, you may be taking a big risk. If the economy weakens and it hurts your company, you could be a two-time loser. If you lose your job, you don’t want to lose a large chunk of your retirement savings as well. Explore whether you can roll it over into a qualified plan that will not be affected by market risk.
If you’ve met your health-insurance deductible, it may be the time to get those expensive medical procedure you have been putting off. Recessions mean sudden layoffs and that means losing benefits.
At some point in our lives, our doctors may need to give us a stress test to determine how physically fit we are. At some point in our retirement planning it is necessary to give our investment portfolio a stress test. This may be that time. It’s great during a bull market. Every month stocks go up. You get richer and richer, and you feel smarter and smarter. In the last two recessions, “smart” investors suddenly felt really dumb when their stocks halved in value.
Re-balance now! Or, even better, capture your gains and rollover into a plan with no market risk.
Sometimes I believe we are hemorrhaging money. We have to have this and that and then something else. Take a look at the costs and expenses that are just our wants and not our needs. In most cases, we will discover we are really spending our retirement funds now instead of during our retirement years.
Take that money that you are hemorrhaging and shore up your emergency fund. Be ready for those huge bumps in the road to retirement. Be prepared for those bumps without having to reach into your retirement funds.
When you reach retirement and begin to live on your savings, hopefully your funds will outlive you. That should be the goal of every retirement plan and it takes a lot of hard work and wise decisions.