“If he moves to bonds, he may feel safe now, but he may not get enough growth out of the portfolio to sustain a long retirement,” Keady says. Turning to cash may not be the answer either. “It is unrealistic to think the investor will get it right twice: once when he turns to cash now and again when he wants to get back into the market later.”
A viable option is to create an income floor with an annuity or move into real estate, which has more staying power, he says. “The important thing is for the advisor to warn him that things will not always be rosy. The investor should start thinking about this before the age of 60.”
Keady likens investing to driving a car. “You can’t put on a seat belt after the car starts to slide into a ditch. You have to put it on before the crash. The seat belt won’t keep you from getting in a crash, but it will make the outcome much better,” he says.
Part of that “seat belt safety” can be an annuity, says Vrdoljak of Merrill Lynch. “Annuities have a role to play, but not all annuities are alike,” she says. “Variable annuities are tied to market indexes. Fixed annuities can cover basic expenses in retirement.”
Michelle Brownstein, vice president of private client services at Personal Capital in San Carlos, Calif., agrees annuities can play a part in protecting assets but she warns against putting all assets in an annuity. “Think of an annuity as an insurance policy, but it is not a cure-all,” says Brownstein. “And be wary of variable annuities with lots of features because of the fees attached to them.”
Taking refuge from a down market in commodities is an option, but a risky one, according to Rob Cirrotti, head of managed accounts at Pershing. “Commodities can go sideways in a lot of different ways,” Cirrotti says. “Everyone should seek the assistance of an advisor who can be helpful in planning and in providing emotional support in a volatile market.”
But there is a disconnect between advisors and their clients when it comes to talking about a potential bear market, according to a recent study by Hartford Funds. Eighty-nine percent of advisors say they have tried to prepare their clients for a bear market, but only 43% of clients who have an advisor say they have talked about a market downturn with their advisors, according to a survey of 1,005 individuals and 121 advisors.
Michael Hoeflich, wealth manager and Social Security claiming strategist with the Financial Guys in Williamsville, N.Y., said some investors may want to take advantage of the uncorrelated nature of commodities and alternative investments, “but do it in a prudent way, taking your risk tolerance into account.”
Why? “Nobody has a crystal ball. We do not know where the market is going to go day to day, let alone year to year,” he adds.
Investors are slightly more pessimistic about a downturn than advisors, according to the Hartford Funds study. Sixty-eight percent of individuals expect a bear market during 2019, while 77% of advisors say a bear market will not occur until at least the second half of 2019 and 31% of those do not think it will happen until 2020.