This post is the second in a series on working in retirement. You can click here to read part one.
Part One of this series showed how longer lifespans and the desire to save more are keeping folks in the workforce deeper into their retirement years. In this installment, we’ll explore another reason for this trend: nightmares of an unexpected bear market. The fear is powerful, but it shouldn’t rule your thinking—fear-based investing seldom delivers the returns investors need to stay in control of their retirement.
MORE: Interested in retirement advice that you can use right now? If you have a $500,000 portfolio, download our retirement guide called "The 15-Minute Retirement Plan." Even if you have something else in place, this must-read guide includes research and analysis you can use today.
The Ghosts of Bear Markets Past
Plenty of people work longer because they wish to, but for others, there is a darker reason. Many approaching retirement feel betrayed by their investments. In the late 1990s, high hopes of a perma-growing “new economy” based on clicks and the Internet were dashed when the tech bubble burst. Many who were enticed by the big returns in everything dot-com during the tech bubble’s inflation were crushed in the ensuing downturn. The subsequent bull market from 2002 – 2007 was smaller than average for US-focused investors, and those who went heavily into Technology stocks in 2000 likely never saw their portfolios reach pre-bubble levels before 2008. That crash ate into folks’ savings once again, eroding confidence still further. Many investors, including soon-to-be retirees, sold out of stocks from fear, boosting bonds and cash instead. A 2015 survey of baby boomers (aged 55 – 65) found they hold 65% of total net worth in cash investments and 6% in fixed income, compared to a mere 18% in equities. Bonds’ historical returns, though, are far lower than stocks—and bond yields are presently ultra-low, suggesting even those historical returns may not be attainable in the near term. Cash yields nothing, and even with today’s low inflation, cash is losing purchasing power. Should inflation rise, a heavy cash allocation increases risk. The long-term average inflation rate since 1926—3.0%—would reduce a million dollars’ purchasing power today to $400,000 in 30 years.i Making matters worse, the prices of goods seniors often spend most on—like health care and education—have risen more quickly than others.
What History Really Teaches: Bull Markets Win Out
Maybe you’re still thinking: “Sure, but I need to protect myself. Won’t a bear market during retirement send me to the poorhouse?” Not necessarily. Depending on your spending preferences and time horizon, there is likely plenty of time to recover. Since 1929, the 13 S&P 500 bear markets (protracted, fundamentally driven market declines exceeding -20%) have averaged 21 months and a decline of -40%.ii But bull markets are even more powerful! They last almost five years and return 164% on average.iii Over 10-year periods—perfectly reasonable for many near or in retirement—returns are positive 94% of the time. iv Zoom out to 20-year stretches—stocks are positive in every single one.v These totals, remember, include bear markets. Avoiding bear markets is ideal for anyone young or old. But it is not a necessity, and you shouldn’t let this fear stop you from investing in a strategy including stocks, if you need equity-like returns to fund your long-term goals and needs. And remember—those longer lifespans mean you can probably afford—or need—to take a longer view.
Of course, fixed income can be wise for many, and your unique financial circumstances will determine which asset allocation is right for you. But chances are good you’ll need at least some growth component, too. Hopefully these numbers dispel the notion a single downturn around retirement irreparably damages your portfolio. Investing is about managing risk, not eliminating it—that’s impossible. Cash may feel safer in the here and now, and stocks feel scarier. However, stocks’ short-term volatility risk isn’t dangerous compared to the long-term risk you don’t earn sufficient returns to finance your retirement needs. Those hoping to retire on time—and stay retired—likely need some growth.
But take heart: With the right investing approach—an asset allocation that fits your goals and needs, and (as discussed last time) a good knowledge of your likely expenses—you can help control your retirement destiny.
iSource: US Bureau of Labor Statistics, as of 5/18/2016. Annual average of headline CPI, 1926 – 2015.
ii Source: Global Financial Data, as of 3/31/2016. S&P 500 price index level returns during historical bear markets from 1929 – 2016.
iii Source: Global Financial Data, as of 3/31/2016. S&P 500 price index level returns during historical bull markets from 1929 – 2016.
iv Source: Global Financial Data, as of 11/30/2015. S&P 500 frequency of positive 10-year rolling periods, 1926 – 2016.
v Source: Global Financial Data, as of 11/30/2015. S&P 500 frequency of positive 20-year rolling periods, 1926 – 2016.