Retirees Don't Need to Bail on the Market

Falling stocks don’t mean it’s time for retirees to bail for cash

Stocks are down and could be headed even lower, as the Federal Reserve remains laser-focused on battling inflation — even if that pushes the economy into a full-blown recession. Retirees are understandably nervous, but if you’re thinking about jumping out of stocks and burrowing into the apparent safety of cash — think again.

For help managing your portfolio during the down market, consider working with a financial advisor.

The State of the Economy and Investor Response

The market — as measured by the Standard and Poor’s 500 Index — is down 23% so far this year, so it would seem sensible to consider bailing out before you lose even more money. And investors seem to be doing just that. During the first week of September, investors pulled $12.9 billion out of mutual and exchange-traded stock funds.

There’s only one problem: That approach doesn’t work for individual investors.

First, selling in a down market means you’re converting a temporary loss on paper to a permanent loss of cash. A second consideration is that you could be triggering a tax bill if the shares you sell are still worth more than you paid for them. Then there’s the third problem: When are you going to get back in?

Attempting to time the market by switching back-and-forth between stocks and cash means you have to outsmart the market not just once, but twice. You not only have to guess when it’s time to get out but you also need to predict when it’s time to get back in. And if you don’t get it right, you lose twice.

Consider the last significant downturn in the S&P 500:

February 2020: 3,380
March 2020: 2,585 (-24%)
December 2021: 4,766 (+41%)

Investors who bailed because they couldn’t bear a temporary 24% loss missed out on a gain of 41% over less than two years. All they had to do was … nothing. Even at the bottom of that cycle, investors could have reassured themselves by noting that they remained up 9% from March 2017 and up 121% from March 2010.

Even after the rocky third week of September, anyone holding the S&P index can still point to a 24% gain for the last 36 months.

Problems With Cashing Out

A major problem with moving to cash is that you’re guaranteed to lose money. The highest yield a saver could find on a bank savings or money market account during the third week of September was 2.61%. But with inflation running at 8.3% your money is losing 5.69% in purchasing power.

That’s not to say that stocks won’t enter a lengthy downturn, such as the period from 2000 to 2007 or the six-year plunge after mid-2007 triggered by the recession and the agonizingly slow recovery that took until early 2013.

Instead, investors and their advisors should forge an investment allocation that recognizes that stocks do go down as well as up, and utilize dividend stocks, I bonds, annuities, commodity stocks and other tools to limit losses during the market doldrums. Retirees should especially hold a significant chunk of their nest egg in cash and cash equivalents that allows them to ride out market turmoil without running scared to the sidelines. But they also need the long-term growth stocks provide to avoid inflation risk.

Whatever the strategy, nearly any methodical investing approach will perform better than panic selling.

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible,” Jack Bogle, the legendary investor who founded Vanguard and invented the index fund, once observed. “After nearly 50 years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”

The Bottom Line

While it isn’t fun to see the value of your portfolio fall, that loss is all theoretical. Bailing on the market to hold cash makes it real. Investors, including those who are already retired, are better off waiting out the down market and staying invested.

Investing Tips

A financial advisor can help you manage the current bear market. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
There are a number of investments you can make now as a hedge against inflation, another current issue troubling many Americans.