Bear-Proofing Your Retirement through Active Investing

Many investors know the best path to wealth for retirement lies through investing in stocks or stock mutual funds. But as retirement nears, their confidence in the stock market often turns to anxiety.

What happens if a bear market intervenes just before you retire or after you’ve begun enjoying those golden years?

That’s a scary thought, but don’t let fear cause you to make a rash move and toss out all the stocks from your portfolio. By using an active investing strategy, you can keep your money working in equities while shielding your nest egg from bear markets.

Properly executed, a buy-and-hold approach to stock funds can work wonders over the long run. Through bears and bulls, the buy-and-hold investor continues to buy in regular, fixed increments, snapping up shares at depressed prices during down cycles as well as higher-priced shares in up markets in the expectation that succeeding rallies will reward his patience and discipline.

But once you are within seven years of needing to use your retirement savings, you can ill afford a bear market. It is quite possible that a buy-and-hold equity portfolio will take up to seven years to recover its real value at the last market peak before the bear.

You could shift the portion of your money that you anticipate needing over the next several years into cash or bonds. That would help to diversify you against the risk of a bear market.

But what if the market continued to rally from that point? To the extent you allocated your savings out of stocks, you would lose a valuable opportunity to add more wealth to your portfolio.

Fortunately, you have an alternative to cash that still can help guard your portfolio against bear markets. Move a much smaller amount of your wealth into cash or cash equivalents. This would be money that you anticipate needing in the near term. Meanwhile, remain largely invested in stock funds but with a twist.

Stock-invested money that you anticipate needing within the next seven years should be managed under an active investing strategy. If you wish, you can leave your longer-term investment capital in your favorite buy-and-hold stock funds. A combined approach employing both active and buy-and-hold approaches makes perfect sense for many savvy investors.

An active strategy simply is a plan to move money in or out of stock funds and cash equivalents as market conditions dictate.

Some active investors rely on market timing, moving out of long positions in stock funds when a downtrend threatens, re-entering when a rally appears under way. Others employ a sector approach, deploying capital in funds that invest in companies in the hottest industries. When those funds weaken, they reallocate to better-performing sectors or to cash.

Tradingmarkets.com also provides active fund investors and traders an active model portfolio developed and maintained by top money manager Mark Boucher. For more information on the model portfolio, click here.

These and other strategies contain active entry and exit mechanisms which automatically will force you out of investments or trades that get into trouble, thus putting a cap on your losses. This differs from a buy-and-hold strategy, which would keep you invested regardless of the state of the market or your positions.

Meanwhile, active approaches also offer the opportunity to participate in stock funds during rallies and bull markets or strong sector uptrends. This differs from sitting in a money-market fund where your cash lies relatively fallow.