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Bear Market Survival Guide

Craig Birk, Personal Capital’s Executive Vice President of Portfolio Management, answers your top questions about how to keep your portfolio safe during a bear market situation. This article originally appeared in the March 2019 issue of Kiplinger’s Personal Finance.

As the bull market diminishes, retirement savers are becoming increasingly nervous about a potential bear market. A recent poll conducted in November 2018 by Personal Capital and Kiplinger’s Personal Finance confirms those fears: A majority of the 1,014 investors we surveyed say they’re worried about the impact of a market swoon before (61%) or during (62%) retirement.

Given recent market volatility, their concerns are no doubt climbing even higher, so here are answers to questions I hear often. Investors will want to keep this information in mind over the coming weeks and months.

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How do I know when it’s an “official” bear market?

History shows us that markets are always cyclical, with bulls giving way to bears, and vice versa. Since 1929, US investors have dealt with 20 bears—defined as a 20% or more drop in a given index. It’s easy to forget, but generally the good times last longer than the scary declines. Indeed, this bull market has been on the cusp of being the longest in history.

Another fact is that a bear’s bite can vary considerably. For example, the Standard & Poor’s 500-stock index has lost more than half of its value four different times over the past 100 years, including each of the last two major bear markets. Bears are always uncomfortable, but most aren’t that bad. We don’t see the extreme valuations of 1999 or the leverage of 2008, so we expect the next bear will be less painful than these last two.

What should I do if or when a bear market begins?

Ideally, an investment strategy should be designed with the expectation that a bear market can come at any time. There should be no reason to panic or deviate from the strategy.

That said, market corrections like what we experienced in the fourth quarter of 2018 can be a good time for a reality check on overall risk tolerance. For example, if you’re losing sleep when the market dives by 15%, your portfolio may be too risky.

At that point, it’s still OK to add diversification to the mix. Once a full-blown bear market arrives, however, it is usually too late to sell. Exiting stocks after things already feel terrible is one of the biggest mistakes people make.

Read More: Beginner’s Guide to Portfolio Diversification

What’s the best way to stay diversified during a downturn?

Ideally, investors should periodically rebalance in all phases of the market cycle. That means selling stocks and buying bonds when the market is strong, and selling bonds to buy stocks when things feel bleak.

This is hard emotionally for many people, however. And it’s where a disciplined advisor can add real value and experienced guidance.

Any specific sectors to watch for defensive or rebound moves?

Unfortunately, many investors time their sector bets with a rear-view mirror, which can be painful. Defensive sectors, such as utilities and consumer staples, generally hold up better in downturns. Stocks that performed best in the bull tend to fall the most in the bear.

This time around that tilt applies to US growth stocks, and tech in particular. Small caps may also provide an opportunity, as they often plunge in bear markets but tend to bounce the hardest, historically outperforming in rebounds. A good rule is to have meaningful exposure to all sectors and excessive exposure to none.

What if I’m hoping to retire soon?

We believe everyone should have a three- to six-month emergency fund and that other liquid assets for general retirement expenses should be invested in a diversified portfolio. But that doesn’t mean the portfolio has to be aggressive. A good portfolio for many approaching or in retirement can be mostly bonds. It’s simply wise to have a personalized strategy designed for both up and down markets.

For more information, read our free “Investor’s Guide to Volatile Markets”.

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