Retirees: 7 Lessons from 2008 If There's Another Crisis

October 11, 2016 — 11:33 AM EDT

There’s no doubt that the early part of 2016 caused investors to pause and ask this question: Is the multi-year bull market coming to an end? Even worse, a January 26th CNNMoney poll of economists put the odds of the country sinking into a full-on recession at 18%. That’s hardly an alarming percentage, but the number is trending higher and it’s more than enough to cause anxiety in retirees who rely on their portfolio to sustain them once they stop working.

How to Protect Your Portfolio

How can somebody who is already retired or is approaching retirement better handle the next financial crisis? Many investors say that the economy is going through a healthy correction, but there’s no doubt that another financial crisis will come one day. What should you do to avoid making the same mistakes so many retirees made in 2008? Consider these seven options.

1. Keep Calm and Sit Tight

You might think older investors would have seen enough to be emotionally stable about weathering a crisis, but that’s far from true. Emotion amplifies market moves and retirees aren't immune. Things tend to go down more than they should because panic sets in. Anybody who watched the markets in 2008 remembers hearing about all the older investors who sold out in fear as they watched their resources shrink.

Not only did many sell more than they should, but too many retirees waited too long to get back in and missed the gains that the bull market that eventually emerged delivered to investors.  If they had stayed invested, they would have continued to earn money in dividends and locked in some healthy capital appreciation.

In July 2007, before the market crash , the Standard & Poor’s 500 sat at 1,526. As of October 6, 2016, it’s roughly 29% higher at 2,161. Next time, make adjustments but don’t sell out.

For more on this topic, see What to Do During a Market Correction (Other Than Panic).

2. Get Ready to Buy

Billionaire investor Warren Buffett knows that the market is emotional. His famous quote, “Be fearful when others are greedy and greedy when others are fearful,” is studied in college economics classes all over the world. When the market is crashing, and everybody is running, that’s when the real buying opportunities show up. For more on how Buffet does it, see Warren Buffet: Be Fearful When Others Are Greedy.

3. But Don’t Hoard Cash

You shouldn’t hold too much cash in your accounts anxiously awaiting the next market crash. The older you get, the more you're likely to rely on dividends and interest to grow your balance. Cash provides neither of those. Your cash has to be deployed to create any kind of wealth.

4. Don’t Try to Time the Market

You’ll hear a lot of advice (like ours above) to buy when the market is in turmoil, but that doesn’t mean you should pick the spot where the market is at its lowest. Most investors are really bad at timing the market. Even the pros aren’t very good at it. Instead, dollar-cost average. Buy in increments as the market continues to fall and follow the advice in Buy-and-Hold Investing vs. Market Timing.

Another alternative: “You can decide at what price the investment seems attractive. By doing this, you might not invest at the bottom, but if you find a price you are comfortable with, then it shouldn’t matter what the price fluctuations are on a day-to-day basis,” says Kirk Chisholm, wealth manager at Innovative Advisory Group  in Lexington, Mass.

5. Hedge

Hedging is simply insurance on your portfolio. You can hedge in a variety of ways, including changes in asset allocations, options strategies and more. Hedging is a skilled investing technique, so talk to your financial advisor about ways to hedge your portfolio if you’re uneasy about the market.

6. Don’t Load Up on Stocks

As retirees have noticed that their portfolios are well short of what they need to sustain them during retirement, many have dramatically upped their level of risk by stuffing their portfolios with stocks and stock-based funds. It’s a bet that has paid off for many years now, but with 2015 ending flat and predictions of a correction this year, some worry that retirees taking on too much risk could be in trouble if the bull market gains are over. 

Keep your allocations appropriate even if you’re behind on savings. Taking on outsized risk isn’t going to produce an equal-sized reward.

“Prior to and in retirement, you need to recognize that if you take on too much risk, you no longer have any working years to recover from significant losses,” says Robert E. Maloney, financial advisor and founder of Squam Lakes Financial Advisors, LLC, in Holderness, N.H.

7. Diversify

Diversification doesn’t just mean to diversify your Wall Street-style stocks and bonds. (See also: Retirement Planning: Asset Allocation and Diversification.) Depending on your level of income, sophistication as an investor and other factors, you may add real estate, fine art, currency and other investment products to your retirement portfolio.

“Annuities can be a way for retirees to diversify, satisfy their income needs and invest accordingly without sacrificing their entire retirement or investment accounts to complete risk,” says Carlos Dias Jr., wealth manager at Excel Tax & Wealth Group in Lake Mary, Fla. “They are an alternate solution to other safe investments, such as CDs, money markets, savings accounts and even Treasury bills. Remember, it’s not what you make, it’s what you keep.”

The Bottom Line

For centuries markets have crashed and recovered. Each time markets head south, people say that it’s different this time. If history is a guide, the next time financial markets fall, they will eventually recover. Don’t panic. Instead, sit tight, make appropriate small-scale changes if necessary and ride it out.

“The only adjustment that investors should be making during a crisis is to rebalance their portfolio back to its overall targeted risk level,” says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif. “Trying to change your risk exposure during a crisis is a recipe for disaster since you are essentially trying to time the market, which is equivalent to gambling with your life savings.”

(See also: How to Make Your Nest Egg Last? Don't Sell Stocks When They're Down.)