A Bear of a Market

Various polls have indicated that one of the greatest financial fears that Americans face is living out their retirement years with a vastly reduced income. It's not an unwarranted concern. Life expectancies are increasing with medical advancements and the U.S. Department of Labor reports that more than 60 percent of all private sector employees now are retiring before age 65. The dismal performance of the stock market during the past 21/2 years has compounded the problem.
Adjusting to a bear (or weak) market is much easier during a person's work life than it is during retirement. For a young person, a bear market during the early accumulation phase is not so bad; contributions into their retirement plans will buy more shares for the same dollar amount. Those approaching retirement, though, are impacted to a much greater extent because the decline in the accumulated value of their equity investments overwhelms the benefit of buying additional shares at lower cost. As the value of their retirement funds shrinks, more Americans now are choosing to delay retirement. 
The retired person may have an even more difficult decision to make -- whether to re-enter the workforce during an economic downturn. A recent Business Week survey reported that 37 percent of retirees who have continued to work did so because they needed the money; this is up from 25 percent in 1998.
Whether a retiree can adjust personal spending depends on his or her debt load and required budget expenditures. If a retired individual is debt-free, this reduces the required payments needed to service mortgage, auto and other types of consumer debt.
Tough economic times may require a reduction in discretionary spending to help ensure retirees do not outlive their resources. Those who choose to continue to deplete their retirement account at the same rate as before the market decline face the possibility of exhausting their nest eggs before their deaths or having to go back to work -- neither choice what they had envisioned years earlier as a young wage earner. 
Asset allocation determines the appropriate mixture of investments in one's portfolio to fit his or her risk attitude and life goals and objectives. A longer holding period typically means a person can accept more investment risk because there is more time to recover from a loss before the money is needed. Just as a college fund portfolio should reduce the equity exposure as the child approaches college age, so should the retirement portfolio as the worker approaches retirement. This does not mean the retiree should have only fixed investments during retirement. The appropriate blend of equities and fixed-income investments should fit the individual's needs in terms of producing adequate income for retirement, but it should not result in sleepless nights due to inappropriate levels of risk.
The tendency to panic and sell stocks during a declining market is referred to as "feeding the bear" and can result in lower returns in the future. Maintaining a predetermined asset mix means selling stocks during a bull (or strong) market and holding during a bear market. For retirees, this means as equity prices fall, one should liquidate more fixed-income investments -- a difficult decision for most investors. 
Ultimately, keeping the asset mix in balance should help you avoid "feeding the bear" or "running with the bulls" -- and consequently be able to enjoy a more assured retirement.
 

Dr. Potts, BBA '70, MS '71, PhD '78 (University of Illinois), is professor of finance in Baylor's Hankamer School of Business. He is past chair of Certified Financial Planners Board of Standards (1993).