By Elizabeth O'Brien

The market's huge rally on Wednesday should reinforce an important lesson: It's usually best to do nothing when things go haywire.

Investors who panicked and sold before the rally would have missed out on a historic day for markets, with the S&P 500 index gaining nearly 10% -- erasing much of the damage since President Donald Trump launched his "Liberation Day" tariffs on April 2. The index's 474-point gain was the largest one-day point gain on record, and U.S. stocks overall gained a historic $5.1 trillion in market value.

Still, it would be premature to call the all-clear. Volatility remains elevated, with Trump's policies changing almost daily, and the bond market is on edge, with Treasury yields rising on inflation fears. The decline in fixed-income prices (which move inversely to yields) may be particularly painful for retirees, who tend to hold more bonds.

For retirees and near-retirees, the volatility should also be a reminder to have some portfolio shock absorbers and make sure you're prepared if the markets take another leg down. Here's what you can do to protect your portfolio and income:

Check Your Cash Cushion

Many advisors recommend that retirees hold between one and two years' worth of portfolio withdrawals in cash. This is the amount you need to meet essential expenses, after factoring in Social Security and other income sources.

A cash cushion can help you ride out market volatility without touching your stock portfolio. The average bear market -- characterized by declines of at least 20% -- lasts between nine and 10 months, and it's best if you can wait it out without selling stocks when they're down.

Granted, the market's turmoil reflects a range of outcomes from Trump's shifting policies: We could be heading into a more prolonged downturn than average, or even a lost decade like we saw after the dot-com bubble burst in 2000. "I think it's a good time to be conservative," says Steven Conners, founder and president of Conners Wealth Management in Scottsdale, Ariz.

The optimal mix of stocks and bonds will vary from investor to investor. Many advisors like the classic 60/40 portfolio of stocks and bonds, which is down 6.5% this year. But some prefer a more conservative allocation of 50/50 or even a 40/60 blend in this market.

Whatever your target mix, it's not too late to derisk your portfolio, says Christine Benz, director of personal finance and retirement planning at Morningstar. While bonds have oscillated in recent days, fixed income has a good record of providing ballast during recessions, she says, in case the economy slips into one.

Those within several years of retirement can direct new 401(k) contributions to a combination of cash and high-quality short- and intermediate-term bonds, Benz says.

Many retirees have too much equity exposure after the 20%+ gains of 2023 and 2024, and they might have to sell some stock to raise their cash cushion. Gains like Wednesday's provide an opportunity.

"While we're in this tariff tantrum, use the surges to pare back your [stock] allocation," says Richard Saperstein, chief investment officer at Treasury Partners in New York City.

Because investors have no way of predicting what the next day -- or even the next hour -- will bring, it's fine to proceed slowly, selling a little at a time over days or weeks to reach your target cash allocation, Benz says.

You can also raise cash outside your portfolio. Online marketplaces like Facebook and eBay make it easy to unload household items, but to get the most bang for your buck, think beyond housewares and trinkets to big-ticket items. Used cars, for instance, may soon be more valuable if Trump's tariffs remain on imported vehicles. This may be a good time to unload that beater you've been storing in the garage.

Consider Tax Moves

One silver lining of a down market is that it offers opportunities for advantageous tax moves. For example, you could sell depreciated securities and lock in the loss to offset future capital gains. "Tax-loss harvesting is making lemonade out of lemons," says Steve Branton, managing director and advisor at Wealthspire Advisors in San Francisco.

Roth conversions also become more attractive in a down market. In this move, you convert part or all of a traditional, pretax individual retirement account to a post-tax Roth account. You'll owe ordinary income tax on the amount converted, but the bill will be less when your balance is lower. The payoff is a bucket of tax-free money that gives you additional flexibility through retirement and is a great vehicle to pass down tax-free to heirs.

Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 10, 2025 02:00 ET (06:00 GMT)

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