O<\/span>kay, so you\u2019re late in your career. Perhaps ten to 15 years from retirement.<\/p>\n Your pension pot is sizeable. But you\u2019ve still got a way to go before it can support your ideal retirement lifestyle.<\/p>\n The problem? A major stock market crash<\/a> would set you back years \u2013 creating a hole that can\u2019t easily be repaired by new contributions.<\/p>\n This is dubbed the Retirement Red Zone<\/a> by researcher Michael Kitces. Here sequence of returns risk<\/a> looms largest over your road to freedom.<\/p>\n Once you\u2019re in the red zone, your wealth outcome depends more on future returns than on future pension contributions.<\/p>\n A run of good equity returns in the next decade or so can speed you to the retirement finish line. Think of it as like a Boost Pad in Mario Kart<\/em>.<\/p>\n Unfortunately, bad returns could lurk around the corner like banana peels. Hit one and you could spin off your retirement track:<\/p>\n Shifting your asset allocation from equities to more defensive assets<\/a> is the tried-and-trusted way to reduce such risks.<\/p>\n The quandary is that the historically average investor<\/a> scored the highest average returns by sticking with 100% stocks. So derisking is likely to reduce your long-term returns.<\/p>\n The key point to grasp: you\u2019re not an average.<\/p>\n I don\u2019t mean you\u2019re a beautiful snowflake.<\/p>\n I mean you get one shot at this.<\/p>\n You\u2019ll only ever travel along one foggy route to retirement. And we can\u2019t know in advance whether it\u2019s paved with Boost Pads or banana peels.<\/p>\n So how long can you stay pedal-to-the-metal in a high-risk, high-reward portfolio?<\/p>\n When should you ease off the equity gas, such that you can still reach your destination on time while lowering the chance of skidding off on the final bend?<\/p>\n Derisking your portfolio pre-retirement series<\/strong> Read part one<\/a> of the series for the scene-setting explainer. It covers the central dilemma of derisking and runs through the risk modifiers that could influence your strategy. Note, this series assumes you intend to live off your portfolio<\/a>. Some people have other options and can afford to ignore the Retirement Red Zone. If that\u2019s you, and you\u2019re willing to bear the risk of 100% equities, then best of luck!<\/p>\n One way to think about when you should derisk is to consider how long it takes to recover from a bear market<\/a>. These are the stock market carve-ups most likely to derail your plans.<\/p>\n The average bear market recovery<\/a> time for a 100% world equities portfolio is six years and six months. That\u2019s an inflation-adjusted figure, which is what really matters since your cost of living will rise over time, too.<\/p>\n Recovery here means you just about get back to where you were before the crash. You\u2019ve still got to reach your actual target retirement number.<\/p>\n The average bear market recovery for world market equities masks a range of fates:<\/p>\n And even that lengthiest global market bear was outdone by a terrible 16-year recovery slog found specifically in the US stock market record. This dream-crusher was formed from two bears that arrived in quick succession. Merge them into a single event and equities were underwater (aside from two months of real-terms recovery time) from December 1968 to January 1985.<\/p>\n As this chilling example demonstrates, you really can be battered by multiple bears in your final years of accumulation.<\/p>\n On the other hand, you might avoid a bear market completely.<\/p>\n Moreover, the timing matters.<\/p>\n Imagine your portfolio as a civilisation that\u2019s learned there\u2019s such a thing as killer asteroids.<\/p>\n You know these cosmic collisions can vary from extinction-level events to flattening a bunch of trees in Siberia.<\/p>\n Sadly, your telescopes, astronomers, and computers can\u2019t predict when the next Big One will be. They only know it will definitely happen at some point.<\/p>\n As the President of Earth, you order up a planetary defence system.<\/p>\n If you move enough money into the project then you could have a pretty good \u2018iron dome\u2019 operating in short order. Maybe even a golden dome!<\/p>\n But that\u2019s expensive and it interferes with the other priorities of your United Earth global government. Such as maxing out growth! <\/p>\n So you decide to hedge your bets, mandating a gradual deployment of resources into anti-asteroid BFGs<\/a>.<\/p>\n After all, the Big One might never happen.<\/p>\n You are indeed a wise and AMAZING PRESIDENT!!!!!!!!<\/p>\n Even if you do say so yourself. <\/p>\n But wait! Your chief-of-staff cuts the power to your tanning bed to point out a flaw in the strategy.<\/p>\n What if a massive space rock smashes the planet in the next few years? Maybe even next year? While defences are still flimsy?<\/p>\n Yes, in a decade\u2019s time you\u2019ll have low Earth orbit bristling with nukes.<\/p>\n But until then the population will have to make do with hard hats and huddling in tube stations if the joint gets wrecked.<\/p>\n \u201cInsolent cretin!\u201d <\/em>you sagely respond. \u201cThe longer we delay dealing with the risk, the greater our future wealth.\u201d<\/em><\/p>\n \u201cThe people will rejoice and be happy! Assuming we\u2019re not all flattened in the meantime.\u201d<\/em><\/p>\n \u201cIt\u2019s more costly to defend a smaller civilisation and there\u2019s less point in doing so. I can\u2019t justify that to the voters \/ demons in my brain.\u201d<\/em><\/p>\n \u201cHence I\u2019ll strike a balance between jam today and jam tomorrow. Don\u2019t worry. It\u2019s the same principle with climate change and look how well we\u2019re doing with that.\u201d<\/em><\/p>\n You pop your shades back on, fire your minion, and dictate a decree ordering a shift of 2% of planetary wealth into defences for the next decade.<\/p>\n OK, let\u2019s see if there\u2019s a way to rev up those bear market recovery schleps. <\/p>\n In actuality, six years and six months average recovery time is probably too pessimistic. That\u2019s because investing through the downturn will hasten the recovery, depending on the size of your portfolio contributions.<\/p>\n The table below shows this effect on the last two bear markets, both of which were monsters:<\/p>\n\n
N of one<\/h4>\n
Give yourself time to recover<\/h2>\n
Scare bears<\/h4>\n
\n
Derisk early or late?<\/h2>\n
An inconvenient truth<\/h4>\n
Repair job<\/h2>\n
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