The Bear Market Protocol: 3 Strategies to Consider in a Down Market

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I've never met an investor who was scared of growing their portfolio too much. It's the next market crash that causes investors to hold their breath and hope for the best.

Fear of the next market crash is often based on two false assumptions: That you may need access to all of your money at any time and that the only response to a downturn is to wait it out. In reality, neither is true.

What if I told you that the next downturn isn't something to dread? In fact, I believe the next market crash could significantly benefit those planning to retire soon or who have recently retired.

The reality is, if you are positioned correctly, your overall retirement plan and portfolio could benefit in ways that many do not realize.

No one can time the market. That's not what I'm suggesting. However, if you think outside of the typical stock/bond fund portfolio, you may be better positioned to take advantage of the next bear market, whenever it happens.

In this article, I'll share some of the strategies for that from my soon-to-be-published book, The Bear Market Protocol.

The Bear Market Reserves allocation

The premise of the book (and your ability to implement the strategies below) is that no one can time bear markets. Instead of trying to time the market, what if you kept a portion of your assets in investments or products with growth potential and some form of protection?

I call them Bear Market Reserves.

There are many that could work as Bear Market Reserves, including CDs, Treasuries, buffered ETFs with a 50%-plus buffer, fixed indexed annuities (with a five-year period-certain payout) and so on.

The purpose of these assets in your portfolio is simple. When markets go down, you tap into this part of your portfolio and implement one of the strategies mentioned below.

Income during a bear market

If you've ever been to a dinner seminar that sells lifetime income, you've probably heard of something called sequence of returns risk. The idea is that if you take income from an account that has lost money, you amplify the loss, making it more difficult to recover.

While that is mathematically a true statement, that doesn't mean you need lifetime income from an annuity. You can also avoid sequence of returns risk by taking income from investments or products that have not lost money or gone down in value.

In other words, when markets go down, just take income from your Bear Market Reserves until your other accounts recover.

For example, you could take income from a CD/Treasury/ multiyear guaranteed annuity (MYGA) ladder you put together. You could turn on a five-year income stream from a fixed-indexed annuity, assuming your purchase of that allowed you to do so without penalty.

There are many bear market income options available, but it only works if you fund those reserves before the markets go down.

Accelerating your IRA to Roth conversions

IRA-to-Roth conversions are a popular strategy for many retirees. The taxes you pay when you convert are based on the dollars converted, not the number of shares.

That means, if the price of your shares dropped, let's say by 50%, in theory, you could move twice as many positions (shares) over from your IRA to your Roth for the same tax bill as if you had converted them before the downturn.

This strategy works only if you pay the taxes using your Bear Market Reserves (assets that haven't dropped in value because they include some form of protection).

If you pay the taxes by selling investments that are already down, you lock in losses and further weaken the portfolio. But if taxes are paid from your Bear Market Reserves, you can take advantage of lower market values without sacrificing the recovery and long-term growth potential.

Black Monday or Black Friday

On October 19, 1987, the markets crashed by over 20%. This day would later be referred to as Black Monday. For those who were invested in the market, it was a scary time.

For those who had money on the side in protected accounts (aka Bear Market Reserves), it probably felt more like a Black Friday shopping sale. If you were to buy the dip, you would be buying the market at a 20% discount.

Warren Buffett once said, "We don't have to be smarter than the rest; we have to be more disciplined." That's the idea behind treating bear markets like "Black Friday sales." Bear Market Reserves act as "dry powder" to buy undervalued stocks when others are panicking.

Conclusion

Bear markets are inevitable, but with the right strategies and a portfolio designed to support them, you may end up excited about the next market downturn.

It's not about prediction. Remember, no one can predict the market. The Bear Market Protocol is about positioning a part of your portfolio with reasonable growth potential with some sort of protection so that when the markets fall, you can take advantage of the opportunity.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.