Why Are You Afraid of a Bear Market?
by Paul Ruedi
On our most recent radio show we had an interesting and somewhat counter-intuitive discussion on bear markets. For whatever reason, there seems to be increased concerns a bear market is on the horizon these days. When presented with these concerns, my son David mentioned he often wants to take the Socratic route and ask, “why are you afraid of a bear market?”
Obviously it is painful for people to see their account balances drop when the stock market drops. But is this devastating enough to justify the amount investors worry about bear markets? In my opinion no. Not only that, I often find myself rooting for our new clients to experience a bear market early in retirement.
Not everyone should fear a bear market equally, or at all. People who have a decade or more to save for retirement should consider a bear market a temporary sale on the things they were intending to purchase anyways.
But of course, the people who are most concerned about bear markets are the ones who do not have a long time horizon before they will have to sell. The retiree who is currently living off their investment portfolio, for example, would have to sell at depressed prices to fund their lifestyle during a bear market. Certainly that spells trouble right?
Though I’m not going to suggest this would be a walk in the park emotionally for a new retiree, a bear market for a new retiree should not derail retirement if they entered retirement with a spending plan built on reasonable assumptions. One of those reasonable assumptions is that bear markets happen, and the plan must work out even if one occurs at precisely the wrong time.
As strange as it sounds, I often tell clients I hope they get a tough bear market early in retirement. That is because a bear market is the ultimate test of a retirement planning process. Once a retiree has lived through a bear market and come out on the other side unscathed, they tend to worry less about the next bear market. In this way, market turmoil early in the retirement journey can actually result in decades of greater peace as a retiree.
The key to a retirement where you don’t worry about bear markets is a retirement plan that is built on reasonable assumptions and therefore won’t be derailed by a temporary decline. If you aren’t able to build a retirement spending plan yourself, you may want to talk to a retirement planner.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.