The Best… And Worst Thing Retirees Can Do Ahead Of A Big Market Decline

The Best… And Worst Thing Retirees Can Do Ahead Of A Big Market Decline

Posted On July 24, 2020 1:12 pm

In part one of this series, I explained what JPMorgan’s head quant thinks is potentially driving the craziest stock market bubble in history.

In part two I explained one of the smartest ways retirees can protect themselves from the carnage that always follows the eventual popping of all bubbles.

In part three I explained the potential exact catalyst that could send the S&P 500 plunging 30% in short order, possibly by the end of the year.

Now in the final and most important installment of the crazy bubble series, I’ll explain the best and worst ways retirees can prepare for the inevitable short-term market pain that’s to come.

One of these I’ve already covered in part two. What makes this article the most important one of the series is that the smartest immediate way you can protect your net egg is the one you can use immediately if your personal prudent risk-management rules require it.

After that, I’ll explain the single worst mistake retirees can make, that has killed more retirement dreams than any bear market in history.

Prudent Portfolio Rebalancing: The Smartest Way To Protect Yourself From The Inevitable Popping Of This Bubble

In part two of this series, I explained the importance of sensible diversification and prudent asset allocation for your risk profile.

Well over time you must maintain that proper balance between stocks, cash, and bonds because stocks will naturally outperform the other two.

Here is how a 60/40 stock/bond portfolio would look over time. At the height of the tech bubble it was 77% stocks and at the end of 2019, the 2nd best year for equities in 20 years, it was 80%.

Today, depending on which indexes you owned, it could be 85% stocks, 15% cash and bonds.

While such a “buy and hold forever” approach might work for a few truly volatility insensitive investors, it leads to truly gutwrenching volatility that can turn all but the most disciplined investors into forced sellers in a bear market.

60/40 Portfolio Rebalancing Strategies 1994 to 2019

Over the last 25 years, annual rebalancing has been the most effective way of achieving both strong absolute and volatility-adjusted total returns.

It’s also been the most tax-efficient strategy other than not rebalancing at all.

Dividend Kings recommends annual rebalancing, on a schedule, so that you avoid overtrading, one of the cardinal sins that, as I’ll soon explain, is the single biggest retirement killer in history.

If your current asset allocation is dangerously out of whack, meaning outside of your stock/bond/cash allocation ranges, then trimming your most overvalued stocks to rebalance into bonds/cash is NOT market timing, it’s prudent risk-management.

But be very careful to not use a market bubble such as this as an excuse to market time.

The difference between prudent rebalancing and market timing is that rebalancing means bringing your asset allocations back into a reasonable range for your risk profile.

If you’re targeted asset allocation is 70%, and you’re now 85% stocks, then you’d only trim enough stocks to get back to your target allocation range. You’d still own 70% to 75% stocks.

You NEVER jump “all in or all out” of stocks or otherwise make major and sudden shifts in asset allocation that aren’t likely to meet your long-term goals.

And here’s why.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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