Preparing Yourself for a Stock Market Downdraft

The current market bull run is the second longest on record. To become the longest ever, this rally would need to continue to 2021. It is easy to be uneasy about where we were in March 2008 and where we are today—and anybody who suggests they know how this will play out is kidding you and themselves. A powerful mantra to always remember is "nobody knows," not even the so-called experts.

With that said, while we don't know when the next bear market will happen nor how severe it will be, we do know it will happen. How do you prepare yourself? Here are a few tips beyond the obvious age-appropriate asset-allocation guidelines:

The next crisis is an opportunity.

If you are in your working years, a downturn can be a window to buy stocks "on sale." If you view every paycheck deferral or systematic investment as buying a great deal on stocks, the pain you feel in the existing portfolio may ease. Moreover, investors of all ages may find the gumption to shift existing funds outside of the stock market into it if the "opportunity" mindset overcomes the "crisis" emotion.

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This is much easier said than done, because money is very emotional. Managing these emotions is part of our collective challenge.

Managed money, allocation funds and target retirement date funds have a pitfall.

Let's say you are retired and your entire portfolio is in one of these increasingly popular investment devices with a built-in 60/40 allocation. You are using this portfolio to replace your paycheck and fund your retirement. For many years, you've been able to withdraw money—and the portfolio has grown. You have benefited mightily from what advisers call the "sequence of returns." Retire during a bull market, and your early years of retirement seem easy. But what should you do when the market turns down by 20%, 30% or even 60%? Remember, peak to trough, the S&P 500 lost 49% in 2000-2002 and 57% in 2007-2009.

Retirees using these types of accounts to replace their paychecks face a dilemma: The fixed-income/cash components of those accounts are built in. The investor can't contact the custodian of the fund and ask them to take the distribution from the fixed sleeve. The stock component of the distribution and its down-market loss has been locked in. Make sure you balance your portfolio with three to five years of protected retirement accounts you can cherry pick from for distributions in a down market. This allows the stock components to heal.

Run your portfolio through a "what-if."

How would your portfolio have done in 2000-2002 or 2007-2009? This can be both compelling and sobering. Ask yourself how you would react when that happens again. If panic comes to mind, you have some work to do, either with your portfolio and/or your mindset. What are your Plan B and Plan C scenarios for when it happens?

Capitalism isn't always pretty. Considering that, navigating retirement requires diligence, education and even worst-case scenario planning. Saving and making wise investments impact us daily, both on an emotional and financial level.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jamie Letcher is a Financial Adviser with LPL Financial, located at Summit Credit Union in Madison, Wis. Summit Credit Union is a $5 billion CU serving 176,000 members. Letcher helps members work toward achieving their financial goals and through a process that begins with a “get-to-know-you” meeting and ends with a collaborative plan, complete with action steps. He is a member of FINRA/SIPC, a registered broker-dealer and investment adviser.