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

4 comments on “How I’m preparing for retirement in a bear market

  1. I was a bit scared by your approach in two ways, First, shorting an ETF sounds to me much like trying to predict the market. I’ve been there without much luck. Second you mention a 50/50 allocation, but you say little about what is in your “fixed income” bundle. Junk bonds, short term bonds, CDs. As you probably know there is lots of risk with those.

    I am like you, close to retirement but took a much different approach. I determined how much money I’ll need for 5 to 8 years of retirement and I set that aside in safe investments. Very short term bonds or even better municipal bonds. They are relatively immune to interest rate changes, give a few percent interest and are tax free, in the US at least.

    Then I have my 8 to 20 year money, which goes in high-dividend large companies across many areas. In the recent drop, these stocks only dropped 50% of the market, and they are recovering better than the market. Last is 20+ year and I have the typical stocks and ETFs. Yes very impacted by market fluctuations, but I have 20 years to recover.

    So forget about a stock bond mix, and at this point, keep your money where it can grow the best. And keeping your short-term money in safe funds will let you stop worrying about short-term fluctuations so you can sleep at night.


    • Totally agree with Alan. You do a 50/50 asset allocation with current low interest rates and inflation greater than the interest rates, you are going to run out of money. All you need is a sliver of your funds in any particular year. The rest should be an 8 – 20 year horizon no matter what your age is because you could live another 20 years. The equity portion should be solid that has a traditional standard deviation of about 6 and you will have a nice plodding growing portfolio.


  2. The bucket theory.


  3. I respectfully diagree with the article and the comments. I am 62 and I am still working but I have 90% of my money in fixed income. When I turned 60 i sold my stocks and converted then into US treasuries. I made a very nice profit when I sold my stocks and then I went into US fixed income when the canadian dollar was at PAR. Now I have gained on the exchange rate and also on the capital gain and i didn’t run the risk of loosing principle. I keep hearing about having stocks in an RRSp and this makes no sense to me the RRSP is growing in a sheltered account so why risk loosing money on stocks when the highest tax is on fixed income but the account is sheltered so surely the best investment tool to have in an RRSP is something that would have the highest tax ramifications and the lowest risk. If a person is looking to make a capital gain then the place to do that is in a non sheltered account because capital gains tax is lower than taxes on interest. I have never liked ETFs because basically you don’t know what you are getting. What were the mix of assets bought and sold for. You have no idea and no control so I wouldn’t short ETFS. I don’t have any money in a non sheltered account only in my RRSP and my TFSA but if I did then I would prefer high quality dividend paying stocks like the banks but who knows what is going to happen these stocks could take a huge hit in the next little while and then there goes your hard earned money.


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