What Should Retirees Do During A Bear Market? (2024)

A bear market is the worst nightmare for retirees, as it causes bleeding of their portfolio at a high rate. Unfortunately, if retirees live long enough, they will experience at least a few bear markets. To be sure, a bear market shows up every 3.5 years and lasts for 15 months on average. In addition, the ongoing bull market has already run for more than 8 years. Therefore, retirees should have a well-prepared plan to navigate through bear markets.

Of course, as Mike Tyson said, we all have a well-thought plan until we incur the first punch in the face. In other words, plans are unlikely to be followed during the thick of the battle. However, retirees should not adopt this mindset. If they do not have a plan for bear markets, they are likely to resort to panic selling at the worst time. Therefore, a careful plan is essential for those who want to avoid running out of money.

First of all, retirees should make sure that their portfolio includes as few as possible cyclical stocks in order to minimize the devastating effect of bear markets. As most cyclical stocks pronouncedly underperform S&P (SPY) during bear markets, retirees should certainly minimize their exposure to this type of stocks. Otherwise, the bleeding of their portfolio is likely to be extensive during a market downturn. Cyclical stocks require excellent timing and retirees should certainly avoid timing the market. Instead they should only own bonds with decent yields and stocks with the maximum consistency in growing their earnings, such as dividend aristocrats. In this way, they will minimize the impact of bear markets on their portfolio and their living standard.

Cyclical stocks are those with earnings that highly depend on the phase of economic cycle. For instance, the airline stocks enjoy great profits during good times but incur heavy losses during economic downturns. That’s why many airlines have gone bankrupt in the past while those that survived saw their stocks collapse during economic downturns. To be sure, during the financial crisis, Delta Air Lines (DAL) and Southwest Airlines (LUV) plunged about 75% whereas S&P lost only 55%. In addition, Boeing (BA), the greatest aircraft manufacturer, markedly underperformed the index during the Great Recession, as it plunged 70%.

Energy and materials stocks are also highly cyclical. To be sure, due to the collapse of the oil price in the last 3 years, the stocks of off-shore drillers have plunged 70%-99% even though the economy has kept growing during this period. While Seadrill (SDRL) is in the brink of bankruptcy, Transocean (RIG), Ensco (ESV) and Noble (NE) have lost 83%, 90% and 90%, respectively. Retirees should certainly avoid being exposed to such devastating losses and hence they should always avoid cyclical stocks. In order to make sure that they do not owe this type of stocks, they should just check the performance of their stocks during the last two recessions. If their performance is much worse than that of the broad market, then they should probably avoid them.

A tricky aspect of cyclicals is the fact that they seem extremely cheap and attractive near the top of their cycle. For instance, all the above off-shore drillers were trading at single-digit P/E ratios three years ago, before they started to collapse. Therefore, as the actual prospects of cyclical stocks are counterintuitive, retirees should not attempt to invest in this type of stocks.

On the other hand, non-cyclical companies are those whose earnings remain solid even during recessions, as their products are essential to consumers. Consumer staples constitute a quintessential example of non-cyclical stocks. It is not accidental that most dividend aristocrats belong to this category of stocks. Examples of non-cyclical stocks are Procter & Gamble (PG), McDonald’s (MCD), Wal-Mart (WMT), Colgate-Palmolive (CL) and Coca-Cola (KO). Even during the fiercest recessions, consumers do not curtail their consumption of the products of these companies. As retirees heavily rely on their dividend income, they should definitely rely on this type of stocks, which have kept raising their dividends even under the most adverse economic conditions. Moreover, these stocks are characterized by much lower volatility than the broad market and studies have shown that low-volatility stocks tend to outperform the market in the long run.

It is also paramount for retirees to minimize withdrawals during a bear market. As stock prices are under pressure during a bear market, high withdrawals will result in the liquidation of a great number of shares. Consequently, the portfolio will incur major damage and its ability to provide future income will be permanently impaired. Hence withdrawals should be minimized during rough times. If the withdrawal rate is kept constant, e.g. at 3% or 4% of the portfolio value, then the amount raised will decrease, as the portfolio value decreases. While this decrease in the absolute amount will take place automatically thanks to the fixed rate, retirees should probably also consider reducing the withdrawal percent, e.g. from 4% to 3%.

Just like individuals adjust their consumption downwards when their income is reduced, retirees should do the same. Of course some retirees will claim that they are not willing to make compromises after having worked for many decades. However, ignoring reality is always dangerous and a hard landing to reality will always come, sooner or later. Therefore, just like individuals reduce their expenses during rough years, retirees should follow the same principle.

The reason is that a disproportionally high number of shares will have to be sold to generate the same amount during a bear market. This will result in depletion of the portfolio and hence the latter will generate much less income during the subsequent rebound. In other words, its income-producing capacity will be permanently impaired. That’s why retirees should even try to live off their dividends and interest income throughout bear markets, without liquidating any of their shares. If their portfolio has a 7-digit value, then its dividends should generate at least $30,000 per year and hence retirees should be able to avoid selling shares at the most inopportune moment, particularly if they also receive a pension from Social Security.

That’s why it is critical to enter the retirement phase with ample savings. Retirees with a large portfolio have much more flexibility and can navigate through a crisis much more readily. On the other hand, if some retirees cannot live off their dividends during a bear market, they may want to consider working part-time throughout the crisis. After decades of working experience, they are likely to be able to generate some income, even without strings attached. For instance, they may be able to work from home, on a flexible schedule. Writing on SA is only an example of the options of retirees.

Moreover, it is prudent to minimize luxuries during rough years. For instance, it is worth postponing an extended vacation in Europe even if it has been long anticipated. While a portfolio bleeds in value and the duration of the bear market is unknown, it is unlikely that a retiree will be able to enjoy a luxurious vacation. Instead a retiree is likely to spend the whole day thinking about the impact of the bear market on his/her future and this is certainly not a recipe for an amusing vacation. Therefore, it is much more prudent to postpone a costly vacation and organize it whenever the rebound comes. Bear markets hardly ever last more than 3 years but the uncertainty during a bear market can easily kill a pleasure trip.

Finally, retirees may want to reduce some living expenses thanks to a do-it-yourself approach. As they have ample spare time during retirement, they can certainly put some effort to perform some works, such as those related to their house, garden and car. In addition, while they may have taken shortcuts in their major purchases during their working life due to lack of spare time, they have ample time to compare prices during retirement and can thus save a significant amount of money.

To sum up, retirees should avoid cyclical stocks, as these are the ones that incur the heaviest losses during market downturns. Moreover, retirees should do their best to minimize their expenses during bear markets in order to avoid selling stocks at depresses prices. If possible, they should live off their dividends without liquidating any shares. They should adopt this strategy because the future income-producing capacity of their portfolio will greatly depend on its remaining value at the bottom of the bear market. While most retirees do not want to make compromises after decades of work, they should realize that cost-cutting during a crisis will greatly benefit them, as it will help them enjoy their retirement at full throttle when the recovery comes.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Aristofanis Papadatos