Danger Zone

Published On: April 8, 2025

Written by: Ben Atwater and Matt Malick

Plummeting stock markets, like the present tariff-induced crash, are worrisome for all investors but acutely so for those approaching or in the early years of retirement.

If an investor is lucky, they might build wealth during a multi-decade career, then spend it down over a multi-decade retirement. So, in theory, a saver’s portfolio may be at its maximum value at retirement, and thus most vulnerable to a market crash in the period shortly before and after retirement.

For this update essay, we will call this pre- and post-retirement period the “danger zone.”

We build our investment process and retirement planning advice with this “danger zone” vulnerability in mind. Here we will highlight three tactics we employ to minimize this exposure, along with two things investors can do to help protect their money during these strenuous times.

Bond Allocation

As long-term investors, we never want to sell stocks when prices are falling. But clients in the “danger zone” often need to take distributions from their portfolios, which necessitates occasional security sales.

As we determine an appropriate asset allocation for these clients, we seek to ensure that we invest enough capital in high-quality bonds to cover account distributions for several years while we wait for stocks to recover from a bear market drop. During times like these, we will use your fixed income, whenever possible, to fund your retirement distributions.

High-Quality Ladders

Our fixed income exposure predominantly consists of individual government-guaranteed bonds, typically Treasuries and FDIC-insured certificates of deposit, meaning the risk of loss is negligible.

And we ladder these bonds, meaning we buy issues that mature at regular intervals over time, with each maturity representing a “rung” on the ladder. Laddering ensures that our “danger zone” clients have regular, dependable cash flows to fund account distributions while we wait for stocks to recover. While we go through this period of volatility, we are more than likely to reinvest some of your maturities in money market funds to ensure liquidity for your distributions.

Focus on Free Cash Flow

On the equity side of our portfolios, we focus on free cash flow. Free cash flow is a measure of a company’s profitability that is difficult for management to manipulate. A long history of stable and growing free cash flow does not mean a company’s stock price will not suffer during a violent selloff, but it can be a reliable indicator of a company’s health and long-term viability.

It may not be a flashy approach to equity investing, but in the nearly 17 years since we founded Atwater Malick, it has limited losses during rough patches. In these years, we have had our share of them – the financial crisis of 2008-2009, the Covid scare of 2020, and the inflation scare of 2022. We remain confident our approach will help our clients weather the storm this time too.

What Clients Can Do

For clients approaching retirement who have sufficient disposable income, we often suggest building a cash reserve. Tapping extra cash to cover expenses in the early retirement years may avoid selling either stocks or bonds. It also helps clients “sleep at night” if markets are tumbling during the” danger zone” years.

Sometimes easier said than done, reducing spending during the early retirement years can also go a long way toward preserving an investment portfolio. Even a modest reduction in a portfolio withdrawal rate can have a meaningful long-term impact by leaving funds invested for an eventual market recovery.

We understand these are stressful days for investors, but we remain confident in our proven investment process. Clients who stay invested in companies with a history of solid free cash flows, while owning high-quality individual bonds for stability and income, will survive the downturn and enjoy the recovery whenever it eventually comes.

Our investment process is ready for this day, so we do not need to “react” to events. Rather, we need to do as little as possible, know we are prepared and know we do not need to panic.