The current bear market has caused a great deal of anxiety among people across the world, especially as they see the savings in their retirement accounts decrease sharply. Young people are in a good position in such conditions because they can simply sit back and wait for the market to recover over time, provided that the anxiety does not lead them to make poor decisions.
On the other hand, individuals nearing retirement or who have already retired find themselves in a tricky position. Because of the reduced value of equities in a bear market, pulling money from stocks puts individuals at risk of running out of money. A general rule of thumb is that people should not touch stocks that have depressed in value 20 percent or more.
In such a market, these individuals need to have a strategic approach to finances. Here are some strategies to consider for minimizing losses to retirement savings during a bear market:
Figuring out the Best Financial Move to Make in a Bear Market
The first thing that people need to consider in a bear market is how they will continue to pay their everyday bills. Ideally, individuals can make their bills through cash, bonds, and other sources of income.
If people have the means to continue meeting their bills for a period of three to five years without selling any stocks, they should do so. Within this period, it is probable that stocks will recover, at which point people can start drawing on them again.
To determine whether or not this is feasible, individuals need to calculate essential annual spending and then the amount of money they have available through savings accounts, certificates of deposits, dividends, bonds, and money market accounts. Typically, only low-risk bonds such as US Treasuries or municipal bonds should be included in this calculation.
Ideally, the amount of money available through these non-equity investments is greater than essential annual spending, but people may sometimes need to sell stocks to make ends meet. Before taking this step, it is often smarter to figure out how to reduce spending. If any ability to reduce essential spending in a way that avoids tapping into stocks exist, that is the best way to minimize the effects of a bear market on overall savings.
Once people sell stocks, they lock in the loss from the market. When individuals hold the equity until it recovers, then it is as if they never lost the money to begin with, but selling at a loss means that it is not possible to recover that difference. For this reason, advisors recommend that people take every step to avoid selling stocks during the bear market.
Of course, avoiding the sale of equities is not always possible. If individuals cannot make ends meet otherwise, the path forward that many advisors recommend is allocating enough money from stocks into bonds and cash to cover between six months and a year.
People should do this instead of hoping for a rebound so that they do not get caught in an even worse position when they really need to sell and the market has continued to drop. Historically, bear markets have lasted less than two years on average with a median time to recovery of just over two years.
Even with these statistics, it is important to remember that averages do not always reflect reality and recoveries can look quite variable. For example, after the Great Depression, it took more than 7 years to recover from the 48-percent decline.
What to Think About When the Time to Sell Equities Comes
When selling stocks, it is advisable to wait for a day when stocks seem to be rallying rather than plunging, especially if the decrease is driven by panic. This simple step could help minimize losses.
Investors should avoid putting in a simple market order when they sell stocks in a bear market. This type of sale indicates that the stock should be sold immediately at any price. As the market declines, it could take some time for the transaction to execute and there is the possibility that price will have declined quite a great deal.
A better option is a limit order, which allows individuals to set a specific sell price for the stock. While the stock may take longer to sell, this type of order avoids unexpected surprises.
Once the stocks have been sold, people need to decide how to store the cash. The safest option is a Federal Deposit Insurance Corp.-backed account, or a national Credit Union Administration-insured credit union. With both of these types of accounts, up to $250,000 is insured should the financial institution fail during the bear market. While such failure is very rare, it is worthwhile to protect oneself from it.
Individuals may be tempted to put their money in a high-yield savings account since many have federal backing and recently offered rates up to 1.7 percent. Unfortunately, these rates are difficult to find now, but high-yield accounts are a good idea to maximize return in the interim. Keeping money in these accounts makes it easily accessible in the near future.