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Retired or Near Retired… Market Risk Takes On a Whole New Meaning


Terry L. Norris, CFP®, CLU, ChFC
President & Founder
Norris Financial Group, LLC

Often times we have heard the phrase, “What you don’t know can’t hurt you.” If you are retired or nearing retirement, what you don’t know or understand about market risk can destroy your retirement plans. Market risk is not the same to all parties, and it can be particularly unkind to those who have not adjusted their approach entering retirement.

For the most part, retirees know they need to preserve their wealth.  They understand the concept of reducing or limiting the possibility of large losses in their portfolios.   Although, failure to understand WHY that statement is truer now, often leads to following familiar paths in investing.  The familiar path of the past is fraught with pitfalls for the new or soon to be retiree.

I believe if you asked the majority of retirees, “How have you best accumulated your nest egg over the past many years?” Many would claim they formulated a strategy and tried to stick with it.  The strategies may have varied, but many most likely suffered large percentage declines multiple times over their career. The 1987 crash was traumatic, but lasted a relatively short time before returns were back on track. The bear market of 1990 was dramatic and worrisome, but lasted only about 7 months. In 1998, we had a worldwide currency crisis that sent the market down to bear market levels only to reverse the next year.   The bear market that ensued from a post technology melt down in 2000 and the World Trade Center destruction in 2001 lasted much longer.  Finally, the economic meltdown of 2008 had far more lasting effects.  Yet workers participating in 401(k) plans through all those years were benefited by all of these bad market periods.  In fact, their account balances today are higher (for most) than they would have been had those markets not produced serious declines.

The lesson learned for many over all those years was to stay invested.  Generally speaking, individuals who attempted to time the market without proper training or experience rarely got it right.  The people who trusted the market to recover and rebound over time, benefited not only because the markets rebounded, but also because their 401(k) contributions continued to be invested at market lows.  The systematic deferrals during market lows allowed participants to dollar cost average at significantly lower prices and reap the added benefits as markets rallied back up. The accumulations of 401(k)’s were actually enhanced by the occasional bear market. The idea of staying invested and riding the bear worked because of new contributions.

If you are in or near retirement, the Bear is no longer your friend.  In fact, the Bear will simply destroy your investment assets.  If you are in or near retirement, a bear market without risk management can drag your portfolio down as in the past, but now you will not be adding new investment contributions at market lows.  You will not benefit from those declines by adding more capital.  In fact you will likely be in the withdrawal stage of your lifetime. During Bear Markets the withdrawals act like dollar cost averaging in reverse.  In the midst of a Bear Market your accounts may be significantly lower while you are taking out the very capital you need to remain invested to see a meaningful recovery.

During retirement, you can no longer afford the luxury of riding through the Bear Market. At that point, you must change your mindset.  You must forget the lessons you learned in the past and do all you can to avoid portfolio losses. When you interview an investment advisor, you need to shape your questions much differently.  In the past, you might have wanted to know how that advisor was going to improve your returns. In retirement, you need to know how they will first, avoid losses, and then provide suitable risk‐adjusted return when possible. Surprisingly, many advisers are only accumulation minded. For years, they have encouraged clients to stay invested and ride through market declines. Advisers often rely on the text book teaching of asset allocation.  Asset allocation theory makes account management an easier concept.  How hard is it to add assets to different buckets and say, “There, I’m done, whatever happens will happen and over time it will all work out?” If you hear that message as you enter retirement – RUN.

Actively managing portfolios is not easy. Not everyone is experienced or equipped to do it.  In fact, I would suggest it is pretty rare as firms go.  It is laborious. It requires work and constant attention.  It often requires more trading and decision making. It is, therefore, more costly in time and money to the adviser. However, if you are near or in retirement, you need an active risk management strategy.  Your adviser needs to be able to articulate clearly how they will work to avoid portfolio losses in down markets. The approach needs to be objective, not subjective. Subjective risk management is also referred to as guessing. Objective risk management is formula driven.

I am sure there are some who would decide to just avoid the market altogether. If they have accumulated enough resources to live the lifestyle they desire while enduring negative real returns due to inflation, I say that is the way to go. I have met very few of these people in my career. If they need to produce a reasonable real return while minimizing their loss exposure, then a risk management portfolio approach is a necessity.

One key note to make here relates specifically to those near retirement. Those over the age or 59.5 may be able to continue as a participant in their 401(k), but employ a portfolio risk manager to protect their balances. A failure to do so just before retirement may require working for several more years to recover from a new Bear Market. The time to create a defensive strategy is when markets are at all‐ time highs. A defensive strategy at the bottom of market declines is of less use. Now is the time to address the risk management of your nest egg. If this scenario is something you are concerned about or sounds familiar, we would be happy to explain our objective approach to principal protection.

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