Retirement Planning
Near Retirement? The Danger of Overweighting Stocks
Bear markets don’t always recover as quickly as the last two downturns
With bond yields so low, many soon-to-retire people have loaded up on stocks — exceeding the 60% stocks/40% bonds standard — hoping to boost returns. This makes them particularly vulnerable to a bear market in stocks, and it’s important to remember that not all bear markets recover as quickly as the last two have.
True, this year’s near-35% plunge in the S&P 500 index of leading U.S. stocks was erased by early August in a furious rally of shares. And the late 2018, just-shy-of 20% drop in stocks was erased by late April the following year.
But those two recoveries are not the norm, and the beginning of retirement is a particularly bad time to get hit by a bear market.
What happens to your retirement investment portfolio in the first five to 10 years of retirement will play an outsized role in your security throughout retirement. Having to make withdrawals when a portfolio is already down is a double-whammy, as it further reduces the value of your portfolio. When the rebound comes, you’ve got less to rebound.
That’s not an argument for moving all your money out of stocks — you need stocks to combat another long-term risk: inflation — but to make sure you don’t own too much.
Typically, as retirement nears, it is time to shift a bit more into bonds or cash. And waiting right until you retire to make the shift is dangerous.
According to Sam Stovall, chief investment strategist at CFRA Research, since World War II the average bear market recovery time for the S&P 500 has averaged 25 months. Not five months. Even in “garden variety” bear markets where the index falls 20% to 40%, the average recovery time is 14 months.
In mega meltdowns, a 40%+ plunge, even more patience is needed. The index fell more than 56% during the financial crisis bear market that ended in early March 2009. It took four years for it to get back to break even. That was faster than the wait after the crash of Internet 1.0 that began in March 2000 and sent the index down 49% before bottoming out in October 2002. That time it took 4.5 years for the index to get back to break even.
The recent super-fast snapbacks seem to have plenty to do with Federal Reserve policy. In 2018, the Federal Reserve quickly stopped raising its target interest rate, which had spooked the markets, and cut rates instead. This year, the Fed let loose an array of policy moves that effectively calmed a global stock market meltdown responding to COVID-frozen economies. And that seems to have set the table for a strong recovery.
Now it could be that we’re in a new normal where the Fed always steps in with gusto, and the markets always respond quickly. But there’s no guarantee of either.
So, now might be a really good time to make sure you’re not over-invested in stocks, especially if you’re within a few years of retirement.
At retirement, you certainly still want to have a significant investment in stocks, but it’s also a time when most people shift a bit more into bonds or cash. And waiting right until you retire to make the shift is dangerous. What if between now and then another bear market hits, and this time it takes a few years for stocks to bounce back? You’re going to head into retirement with less than you would have had if you had right-sized your stock portfolio when you had a chance to make some changes with stocks at a high.
Like right now.
After being down nearly 35% earlier this year, the S&P 500 is up more than 10% for the year (through mid November). The market has essentially handed investors a do-over from the earlier losses this year. There’s no saying that’s how it will play out next time.