Considering that market crashes happen more frequently than a lot of people think, in fact 123 times since 1900 to be precise, experienced investors take them in stride. However, for retirees, seeing the stock market suddenly decline by up to 20 percent or more can be very unsettling.
Despite the natural urge to panic, this should not be the first reaction. In most cases stock markets recover from market corrections within a year, and investors whose first instinct is to sell end up losing money by selling low and buying high. The best way to deal with market crashes is to be prepared, think in advance, and take advantage of the situation as it happens.
During market corrections, the value of investments goes down, and many retirees will find themselves in a situation in which they feel they should sell some of their stock in order to cover their day to day expenses. However, a well balanced retirement portfolio should include a significant percentage of bonds allowing retirees to cover their living expenses from the interest receipts from those fixed income investments.
If is also wise to make sure to have money put aside money such as certificates of deposit, savings accounts or other short term investments. This can improve flexibility and offer a variety of alternative options. Considering how quickly markets generally recover from corrections, it is better to leave the stocks untouched, if possible, to ensure their value goes up again before starting to use them to cover retirement expenses.
Another option, a retiree can go a step further and be proactive during a market correction, by taking advantage of bargain price on some stocks. This investment practice, also known as “bottom fishing”, takes advantage of declines in the stock market in order to purchase shares at low prices.
This is the perfect opportunity for a retiree who wanted to buy or increase their holding in a high profile company but could not afford it, to take advantage of the 10 or even 20 percent drop and grab some of these higher long term value shares.