Looking at a chart of monthly inflation-adjusted stock returns from 1886 to today, it’s obvious that stocks fall into bear markets – a 20% drop – from time to time.
The painting I’m looking at was assembled by Paul Kaplan, director of research at Morningstar Canada. One lesson he draws from the data is that after every bear market over the past 150 years, the stock market has finally recovered and hit new highs. The patient investor has been rewarded, at least so far.
The second lesson is that stock market crashes differ significantly. “Not all crashes are alike in their severity and duration, and naming the top or bottom of the market is difficult,” he wrote. “Therefore, it’s best to prepare now for the next crash by holding a well-diversified portfolio that matches your time horizon and risk tolerance.”
Kaplan is there. Having a well-diversified portfolio is a sound risk management strategy, especially for those saving for retirement. Diversification doesn’t just protect against downside risk.
“I see diversification not just as a survival strategy but as an aggressive one, because the next windfall might come from a surprising place,” said economist and risk philosopher Peter Bernstein in an interview years ago. with Wall Street Journal columnist Jason. Zweig.
Investment risk is just one type of risk. Dealing with other types of risk may require a different approach, such as risk elimination. For example, the risk for many people nearing retirement is that things don’t go as planned.
“The risk for you is not being able to fund that standard of living in retirement,” writes Bob French, director of investment analysis for Retirement Researcher. “Anything that makes reaching or sustaining more likely reduces your risk, and anything that makes it less likely increases your risk. Everything else is just the details.”
I feel like three household risks stand out in retirement planning. They are too indebted; not finding a job that brings extra income; and the house becomes an albatross later in life.
You may face one of these risks, a combination of them, or different risks.
But the combination of a well-diversified portfolio and the elimination or significant reduction of the risk that most threatens your household’s future standard of living is a strategy for weathering all economic and market seasons in retirement. .
Farrell is a business contributor to the Star Tribune, Minnesota Public Radio and the US Public Media Marketplace.