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I’m concerned that we may shift from a secular bull market in the S&P 500 to a secular bear market at some point, as you know if you read this post about investing in a secular bear market. 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 and 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 from 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 checkup may be overdue. And just because pessimists have been early, or wrong, doesn’t mean the S&P 500 will deliver superior returns indefinitely.
Why Does Sequence of Returns Risk Matter in Retirement
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.
What Should You Review in a 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 U.S. and international stocks can work together. 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.
How Can Taxes Affect Portfolio Changes
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.
You can also use this process to review your investments in the context of your broader financial plan.
Does Your Portfolio Match Your Expected Withdrawals
Finally, while this discussion focused on equities, use the retirement portfolio checkup to evaluate whether your overall portfolio is appropriately aligned with your safe retirement withdrawal rate and 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.
Those expected withdrawals should also reflect the expenses you identified while building your retirement budget.
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:
Withdrawal Rate → Target Stock Allocation
Remainder allocated to bondsBars show the suggested stock allocation as a percentage of the total portfolio. The remaining allocation is held in high-quality bonds.
A retirement portfolio checkup is not about predicting the next market decline. It is about determining whether your diversification, asset allocation, tax exposure, and withdrawal needs are prepared for a range of possible market environments.
Is Your Portfolio Ready to Replace Your Paycheck?
If you are within 5 to 10 years of retirement, Sammy’s free class can help you understand how your investments, withdrawals, taxes, Social Security, and retirement risks fit together.
Watch the Free Retirement Class →Frequently Asked Questions About Retirement Portfolio Checkups
When should someone complete a retirement portfolio checkup?
A portfolio checkup becomes especially important during the five to ten years before retirement, when investments must begin shifting from accumulation toward supporting withdrawals. It may also be appropriate after major market changes, life events, or changes to retirement spending.
What should be reviewed before retiring?
A retirement portfolio review may include stock and bond allocation, U.S. and international exposure, company concentration, taxes, expected withdrawals, cash needs, investment fees, and the ability of the portfolio to withstand an extended period of weaker returns.
Why is sequence-of-returns risk important near retirement?
Sequence-of-returns risk is the danger that poor investment returns occur early in retirement while withdrawals are beginning. Early losses can force retirees to sell more investments at lower prices, leaving fewer assets available to benefit from a future market recovery.
Should retirement portfolios include international stocks?
International stocks can provide exposure to economies and companies outside the United States. They may behave differently from U.S. markets during certain periods. The appropriate allocation depends on the investor’s objectives, risk tolerance, taxes, and overall retirement plan.
How should expected withdrawals affect asset allocation?
Higher expected withdrawals may leave less room for severe or prolonged portfolio declines. Sammy’s framework uses more conservative stock allocations as withdrawal needs rise, with the remainder held in bonds. Individual circumstances may justify a different allocation or withdrawal strategy.
What tax issues should be considered before rebalancing?
Selling appreciated investments may generate capital gains in taxable accounts. Investors should also consider charitable giving, account location, direct indexing, and future withdrawal taxes. A rebalancing plan should be coordinated with qualified financial and tax professionals when appropriate.
