Preparing for retirement in a bear market

How I’m preparing for retirement in a bear market

A bear market can be harmful if you’re a few years away from retirement. The first thing to consider is your time horizon and asset allocation

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When you’re in the Retirement Risk Zone, as I am, the last thing you want is to watch decades of savings go down the drain in a bear market. With most markets already down 20% around the world, you could argue the damage has already been done but there are a sufficient number of pessimists out there who warn the worst case could be down still further, for a peak-to-trough decline of as much as 50%, as occurred in 2007-2008.

Capital preservation is the name of the game when you’re near or at retirement. Recall that finance professor Moshe Milevsky’s definition of the Retirement Risk Zone is the five years before and five years following your projected retirement date. I’m nearing 63 and am semi-retired so take bear markets seriously. A bear market at this stage can seriously undermine one’s future plans.

With the caveat that timing the market is next to impossible, I can describe what I’m doing personally. Much of what follows I owe to my own financial advisor, who does not wish to be identified in this article.

You need to deal with both registered and non-registered portfolios and tax has to be considered in any action. Last week as most know, the Royal Bank of Scotland issued a controversial “sell everything” call that came in for a fair degree of criticism. I wouldn’t go that far but did note elsewhere that the cost of liquidating multiple individual stocks at a full-service brokerage firm could easily cost thousands of dollars.

On the other hand, if you’re a true couch potato indexer and held a single “go-anywhere” ETF from a firm like iShares or Vanguard (see the upcoming issue of the magazine and its latest ETF All-Stars package), and use a discount brokerage, your total cost for selling everything might be as little as $10!

In my case, let’s assume my wealth is equally divided between registered and non-registered accounts. The first thing to consider is your time horizon and asset allocation. Using the “fixed income should be your age” guideline, I should be 62% in fixed income and 38% in equities. But I’m still working and expect to live a long, productive life, so call it 50/50.

Logically, if you’re overweight in equities and see a need to trim the sails, the place to start selling are registered accounts. My advisor suggests starting by selling any winners in your RRSP or TFSA, a process that we began in the fall. Did I mention that it’s better to sell near the top than at bottom?

If you plan to keep to roughly a 50/50 asset mix, and can get there by selling registered positions, ideally you would stand pat with your taxable accounts, which presumably are mostly in stocks: if they are quality dividend-paying stocks then you should care more about the tax-effective cash flow they generate and should not get too worried about the variability in the underling stock prices. In fact, if they do go down and you are reinvesting the dividends at lower prices, that’s a good way to build wealth if you keep to your long-term perspective.

One way to stay invested in your non-registered accounts is to “hedge” your positions. I’m told that only one in a hundred users of discount brokerages actually go short ETFs to hedge portfolios, and this is something you don’t see too much in the general media. However, specialized newsletters from notorious bears have been recommending short positions since the collapse last August.

While going short ETFs covering the broad US or Canadian markets (or both) may be considered a high-risk strategy, it’s actually less risky when you look at the total impact on your whole portfolio. Right now we are somewhere between 1/6th and 1/3 hedged, which means we’re still “rooting” for markets to go up: if markets rally we will be underwater on the hedges but will still be net-long equities even apart from the fixed-income safety net.

But if the worst happens and markets do suffer a “triple waterfall” descent to hitherto uncharted depths, every move down will result in a “move up” in our short positions. Same with gold bullion or precious metals funds if they move up while everything else is crashing: I’ve always held roughly a 10% position in gold/precious metals as “insurance” against a global crash.

If you do choose to hedge fully or in part, expect to be whipsawed. It comes with the territory. And don’t try this at home without the help of a qualified financial advisor who know about options, hedging and risk control.

Jonathan Chevreau founded the Financial Independence Hub and can be reached at jonathan@findependencehub.com.


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