In bearish markets like today's, younger investors can just "stand pat," because by the time they retire, most likely the market will have recovered, and then some.
But older investors may not be able to do so, writes Christine Benz, Morningstar's director of personal finance, in her column, "A Down-Market Survival Guide for Retirees." She notes that "spending from an equity-heavy portfolio that's simultaneously declining means there will be fewer assets in place to recover when stocks finally do. Taking too-high withdrawals from a declining portfolio could permanently impair your portfolio's long-run sustainability, especially if those withdrawals occur early in your retirement."
To avoid the psychological as well as money issues of this kind of move, here's what she recommends:
1. Check the client's liquid reserves.
How much cash do they have on hand? Benz recommends that two years' worth of liquid investments in a portfolio is just about right. That means money in mutual funds, CDs, online savings accounts or even checking and savings accounts.
2. Re-evaluate your client's long-term asset allocation.
Many clients won't have two years' worth of cash holdings, and if not, you should check their portfolio's long-term asset allocation mix. Some allocations might have shifted over the years and need to be rebalanced.
Also check their intra-asset class positioning, Benz says, to see how much was held in small-cap and value-leaning names as well as foreign stocks. It could mean their portfolio is underexposed in areas, she says, that could perform well in the next 10 years.
Finally, keep in mind tax issues while repositioning; "making adjustments in [their] tax-sheltered accounts is usually a good starting point." If the client has to take required minimum distributions or even is in need of cash for next few years, she says "consider trimming appreciated portions of the portfolio."
