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By Ingrid Case
March 13, 2020
José Vélez for Money

The crashing end of the 11-year bull stock market this week is alarming to just about everyone who has invested in stocks, bonds, or mutual funds.

The people who have the most to worry about, however, might be folks who are in retirement or had planned to stop working soon. They counted on the money in their stock portfolios to fund their daily lives. Now those portfolios have lost value.

What should retirees or near-retirees do? Here’s what financial advisers say.

Keep calm

It’s natural to worry when the markets drop, says Raleigh, N.C., financial planner Ian Bloom. “The first reaction you’re going to have is that you’re going to be very afraid, and you’ll hold your breath. Breathe,” he says.

Give your stocks time to recover

Selling equities in the midst of a slide is a go-to reaction for many investors, who want to convert stocks to cash before the stocks lose even more value. It’s usually the wrong move. “Selling stock is often the worst thing to do,” Bloom says.

Historically, markets recover from big drops, and much of the gain is often in the first part of the recovery. For example, the S&P 500 hit the bottom of a two-and-a-half-year bear market on October 9, 2002. Then the recovery began and the same index gained 15.2% over the next month.

The same thing happened in the 2008 subprime crisis. In that crash, the bottom came on March 9, 2009, when the S&P 500 had lost nearly 40%. From there, the market headed up, gaining more than 100% in the next four years.

Sell your stock now, and you probably won’t participate in the first juicy months and years of the recovery to come.

Selling off stock in the early part of retirement can also subject your portfolio to sequence risk. By selling stock now, at low prices, you will end up selling a greater proportion of your portfolio to raise the same amount of money you could get by selling less stock in a more robust market.

Then, when the stock market recovers, the shrunken portfolio can’t benefit as much. “That can have you running out of money a lot faster than if you started while the market is performing well,” says Travis Gatzemeier, a financial planner in Flower Mound, Texas.

Use cash and short-term bonds instead

A properly arranged portfolio is divided between equities — stocks — and fixed income, which includes bonds and cash. Someone in her forties or fifties might have a portfolio that’s 70% stocks and 30% bonds. A person who is in or near retirement should have a portfolio that’s closer to 60% equities and 40% fixed income, or even 50-50, Gatzemeier says.

Retirees should plan to spend that cash, and the cash they get by liquidating fixed-income investments, to fund their expenses.

Cutting back on expenses and using other cash sources might also be important. “You might be fine between cash, Social Security, home equity, rental property income, a pension, and some kind of job or side hustle,” Bloom says. “Ask yourself, ‘Without accessing my stock portfolio, am I okay?’ If the answer is yes, do nothing.”

Sell stocks as a last resort

If you can’t get by without selling stock, sell the equities that have already performed well. “Unless you have some other reason to sell an investment — a fund’s fees are too high, for instance — leave the lower performers alone and let them appreciate with time and market recovery,” Bloom says.

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