I’m concerned that we may shift from a secular bull market in the S&P 500 to a secular bear market soon, as you know if you read this recent post. Reminder: secular bull and bear markets are long-lasting investing regimes (think a decade plus). They include cyclical rallies and declines, but the dominant trend—up in a secular bull, flat or down in a secular bear—is not broken by those shorter-term cycles.
My 25-year investment career has encompassed one secular bear (2000–2013) and a secular bull that has not yet ended. The secular bull before I started went from 1982-2000. The secular bear before that was 1966-1982.
We will experience another secular bear.
Preparing for one is complicated by two realities: bull markets do not come with actionable expiration dates, and sophisticated investors have been prematurely calling for weak long-term S&P 500 returns for years.
But this is not a market-timing call. It’s a portfolio construction discussion. Sequence risk becomes far more dangerous in a secular bear market. A retirement portfolio check-up may be overdue.And just because pessimists have been early—or wrong—doesn’t mean the S&P 500 will deliver superior returns indefinitely.
Sequence of Returns Risk
Turning this concern into actionable portfolio guidance requires a brief discussion of sequence of returns risk.
Investment outcomes do not depend solely on long-term averages. Once withdrawals begin, the order in which gains and losses occur matters. The same portfolio, earning the same average return over time, can produce dramatically different retirement outcomes depending on whether strong or weak returns arrive first.
Early losses force investors to sell assets at depressed prices, locking in losses and eliminating future growth on those assets. Early gains provide a cushion that mitigates this risk.
Asset allocation is the primary tool for managing sequence risk. Portfolios with higher withdrawal needs are structured more conservatively, allowing spending to be funded from high-quality bonds rather than from stocks during downturns.
It works best during a secular bull market where the downturns are brief and recoveries swift. It won’t be nearly as effective in a persistent downturn.
That’s why it’s time for a retirement portfolio checkup.
Your Retirement Portfolio Checkup
The first step is determining whether you are truly diversified. It may sound routine, but in a secular regime shift, it becomes critical.
If you accept that the S&P 500’s extended run may give way to a weaker period, relying exclusively on it for long-term growth is risky.
So, we’re diversifying. Broadly.
It’s tough to be more specific as history offers limited guidance.
The Lost Decade is instructive, but the secular bear beginning in 1966 occurred in a far narrower investment universe. And two examples are not enough to construct a precise playbook anyway.
Here is how I would approach a retirement portfolio checkup.
Analyze your stock holdings to see what your allocation is between U.S., International, and Emerging Markets. Within the U.S., how much is in large cap versus small cap?
If your portfolio is basically U.S. large cap equities like the S&P 500, consider adjustments.
Incorporate international stocks into the portfolio. Here’s how.
Consider adding some U.S. small cap exposure as well.
I would also evaluate how concentrated the portfolio has become in the largest U.S. companies, particularly given recent performance and the current concentration within the S&P 500 itself.
These adjustments can improve resilience, but tax implications matter. Work with your tax advisor and financial advisor to design a diversification plan that minimizes unnecessary tax realization. We have been using various direct-indexing strategies alongside strategic charitable stock donations to manage that tradeoff.
Finally, while this discussion focused on equities, use the retirement portfolio checkup to evaluate whether your overall portfolio is appropriately aligned with your expected withdrawals over the next five to ten years. I outlined a simple framework in my book that can serve as a guide and added it below:
If you’re going to have a steady withdrawal, I’d target the following asset allocation ranges for stocks with the rest being in bonds.
- Less than 4%: 65%–80% stocks
- 4%–5%: 50%–65% stocks
- 6%–7%: 35%–50% stocks
- Over 7%: 20%–35% stocks
