The 60/40 Approach: Retiring During a Bear Market

“Time in the market, not market timing” is one of our longtime mantras. But how does that maxim hold up if you’ve retired and are beginning to draw down your nest egg? What about that worst-case scenario—retiring just before a sustained decline in the stock market? Can your portfolio recover over time?

We decided to find out. The first installment in our Bear Market Case Studies series looks back at one of the longest, steepest market declines in recent years—the drawdown sparked by the Great Financial Crisis—and examines how retirees fared based on their approach to risk.

Case Study #1: The 60/40

Anyone nearing retirement today remembers that the global financial crisis (GFC) of ’07–’09 sparked the Great Recession. From its peak in the fall of 2007, the S&P 500 fell more than 50% over the next year and a half; it took more than four and a half years for the stock market to fully recover.

If you retired in October 2007 with a portfolio of $1 million, how would you have fared? Would your portfolio have recovered, despite taking disbursements to pay your expenses?

The answer is yes. A typical investor with a moderate risk appetite—that is to say, one invested with the traditional allocation of 60% of their portfolio in stocks, 40% in bonds—would have seen their portfolio bounce back to its pre-crash peak in 2013. That’s despite withdrawing $3,500 from their portfolio each month—about 4% of the total. And adjusting for inflation doesn’t change the outcome much: With flat $3,500 withdrawals, the portfolio bounced back by July 2013; even if withdrawals increased to keep pace with inflation, the portfolio was back to its starting point in October 2013.

Partly, that’s because bonds did their bit for our moderate-risk retiree. While the stock market declined by more than 50% during the GFC, bonds, at their worst, fell only 4%. And while stocks took more than three years to make up the lost ground, bonds bounced back from their bottom in three months. That meant the 40% allocation to fixed income in our retiree’s portfolio helped provide a steady income stream during the worst months of the bear market.

While it’s comforting to know a portfolio can climb back over time, enduring a bear market can be unsettling. But there are practical steps you can take to be sure your financial plan has the flexibility to wait out the worst of the storm. First, make sure you’ve built an emergency fund before retiring—that will ensure you won’t be forced to lock in losses during drawdowns. Second, if you have to withdraw funds—and remember that required minimum distributions are mandatory even when stocks are down—be tax-aware in your withdrawal strategy. Tax-loss harvesting may help take some of the sting out of having to sell a position. Leave funds held in Roth accounts for last because they can grow tax-free and give you the most bang for your buck when markets recover. And if merely looking at the chart above makes your anxiety spike, talk to your adviser about reallocating to reduce portfolio risk.

Manager Shake-up at Vanguard’s $7B Global Equity Fund

Marathon Asset Management has been removed as subadviser from Vanguard’s $7.4 billion Global Equity Fund.

Marathon helped oversee the fund since it was launched in 1995. The firm was also removed as a sub from the firm’s U.K. Active Equity Fund.

Vanguard has not made a public statement about the specific reasons for dismissing Marathon. But the London-based shop has had significant high-level turnover of late, according to Jeff DeMaso, Adviser’s interim chief investment officer. Marathon co-founders Neil Ostrer and Bill Arah stepped back from direct oversight of the fund in November.

Some familiar names will be stepping into Marathon’s shoes. Wellington Management and Pzena Investment Management, both longtime subadvisers on several Vanguard funds, will each take over 25% of Global Equity. The other 50% will go to Baillie Gifford, which has overseen a portion of the fund since 2008. Caroline Cai, John Goetz and Benjamin Silver will manage Pzena’s allocation to Global Equity, while Wellington’s portion will be overseen by Brian Barbetta and Michael Masdea. While the Pzena team’s experience is mostly on the value side—a complement to the concentrated growth focus of Baillie Gifford—the Wellington managers currently run a Global Innovation fund, and they will add an additional dose of growth to the portfolio, according to DeMaso.

Adviser’s Takeaways

In recent Takeaways, Account Executive and Financial Planner Diana Linn discussed the future of Social Security, while Senior Research Analyst Liz Laprade talked about what China’s slowdown means for the markets.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com!

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.