Question:
I just retired and the recent decline has made we change my idea of how I should invest my retirement accounts. I need income from these investments to live on but realize I can't put all my money in bonds or Cd's or I will probably run out of money due to inflation. What do you suggest I do? Wait for the market to go up again? How far do you think the market is likely to fall before the next bull market starts? 
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Paul Merriman:
We have been managing money for retirees since 1983 and this is the sixth bear market we have experienced. I hate them all as they fill people (especially retirees) with doubt and anxiety, often causing people to panic and put all of their money in "no-risk" investments.

I have no idea how far down this decline may go but I can share some averages. Since 1960 there have been 10 bear markets (based on the Dow Jones 30 Industrial Index) with average losses of 30%, and a worst loss of 45.1% in 1973. But the majority of investors are not likely to experience those kind of declines as they have their portfolios balanced between stock and bond funds. A popular combination of stock and bond funds, among our clients, is a 50% stock and 50% bond asset allocation. During all 10 of those bear markets this combination (50/50) has limited risk within the limits of most investors we meet. In the market decline from October 9, 2007 through June 30, 2008, the 50/50 split of stocks and bonds lost less than 6.5% in our tax-deferred accounts. That loss is well within the expected one year loss of that combination.

I believe every risk-averse investor should determine their limit of loss they are willing to accept and still stay the course. Once that risk limit is established an investor should go ahead and make their financial commitment. Many are uncomfortable with a lump sum investment and find dollar cost averaging over a period of time, often 12 to 24 months, more acceptable. But be aware that the losses of any combination of stocks and bonds are likely going to hit your portfolio, possibly after you have patiently dollar cost averaged over many months.

I was just reviewing the buy and hold returns (after fees) of our privately managed tax-deferred accounts for the 10 years ending June 30, 2008. For those with high risk tolerance an all equity portfolio compounded at 9.5% compared to 7.3% with a 50/50 stock bond combination. Two percent is a lot to give up over an extended period of time but worth the greater peace of mind a retiree will likely feel with the bond protection.

Those returns may not feel like home runs but they were better than most experienced during the period. Over those same 10 years the S&P 500 compounded at 2.9% and one-month T bills at 3.7%

Paul Merriman is a financial educator and founder of Merriman