The US Stock Market's Check Engine Light is On.

If the US stock market had a check engine light, it would be on. Ten stocks now make up roughly 40% of the S&P 500. US stock valuations sit near the notorious dot com bubble levels reached in 1999, and we precariously teeter between feeling like markets are absurdly overhyped or just getting started. If you're near or in retirement, that warning light should not be ignored. What action you might need to take depends on your situation, but you shouldn’t do the equivalent of covering the dashboard warning light with electrical tape, turning the radio up and hitting cruise control. You should investigate the risk and potential responses.

Let's describe the potential risk, because vague fears don’t lead to action. If you are highly exposed to US Stock indexes, a long, deep market slump — a lost decade like the 2000s — means your retirement will be more restricted, more stressful, or pushed out years. For example, a $2 million IRA can fall by $800K in a few weeks, a $10K monthly lifestyle budget can be cut to $6K. This is not a fringe scenario. It has happened, within the working memory of everyone reading this. It is unwise to try and make any predictions about the timing or cause of market events, but if you at least acknowledge the possibility of it happening and consider the impact then you can make a rational judgement.

I watched the risk become reality for my parents. My father retired in 1999 after forty years in the oil industry — four decades of doing everything the retirement playbook told him to do. His 401(k), fat with late-90s dot-com gains and years of momentum gave him false confidence in the reliability of equities as a the principal retirement asset.

Then came 2000. Then 2001, and 2002. Then, just as things were healing, 2008. He wasn't speculating. He wasn't day-trading tech stocks. He was simply invested where everyone was invested, drawing income from a portfolio that spent a decade underwater — and every withdrawal in those down years permanently shrank the engine that was supposed to fund the next thirty. He still had a retirement. It just wasn't the one he'd worked forty years for. The trips got shorter. The margin got thinner.

It didn't have to happen. Not because he could have seen the crash coming — because a portfolio built for resiliency in retirement would have had less exposure to stocks and could have sailed through the same decade that sank the portfolio.

So here's the question for retirees and those getting close: if you know the warning light is on and you consider the potential pain of a bad market event, does it make sense to still be 50%, 60%, or 70% exposed to that risk?

The three reasons people freeze

Many will ignore the warning light. In my two decades of planning experience, I find one of these three reasons usually explains it. Maybe you see your own logic in these patterns.

Reason one: you can't stand missing out on more gains. After a very long bull market, and lots of false alarms and unfulfilled expert warnings about crashes, it seems more reasonable to believe the US Indexes will just keep going up. You are not worried about painful losses; you are more worried about missing another doubling of your IRA over the next five years if you get too conservative.

In response I would suggest you are playing the wrong game. Your competitive nature and experience investing might have you comfortable with optimizing for “beating the market” and swinging for double digit returns. But that is an accumulation game. Your objective in retirement is income that never runs out and combined with as close to 0% probability of failure as you can get. Different game, different rules, different metrics, different portfolio. Let FOMO go.

Of course a retirement that may last thirty or forty years needs real growth. You cannot hide in cash while inflation eats your purchasing power.  But staying invested and staying invested in one crowded index are not the same thing.

Consider the lost decade itself. While the S&P went nowhere from 2000 to 2009, international stocks, small-company value stocks, real estate, and bonds all made money. A genuinely diversified retiree lived through the "lost decade" and went on to thrive in the subsequent years. Reorient your focus to optimizing for retirement, not beating irrelevant benchmarks or expectations.

Reason two: you haven’t flipped the math. For your entire working life, market crashes were secretly good for you. Your paycheck kept buying shares on sale, and time healed everything. The day you start withdrawing, that math flips upside down. Now a crash means you're selling shares on sale — permanently cashing out, at the worst prices, the very assets that were supposed to fuel your recovery. Two retirees with identical savings can end up in wildly different places based purely on when the bad years arrive. Advisors call it sequence or return risk. Your experience and most generic financial advice screams buy and hold!  Not in retirement. If you have to sell stocks to spend like my Dad, you cannot recover.

That's why "the market always comes back" is true and useless at the same time. The question was never whether the market recovers. The question is what your portfolio looks like when it does.

Reason three: you don't know what else to do. This is the most common reason people don’t act even when there are warning signs. You've been told your whole life that stocks and index funds are the answer—and for many of you they have been a great answer. But if substantial stock index exposure is now the risk, what's the alternative — cash? That won’t work. Rental homes? Who wants to be a landlord? Like many hard things in life, you know acting on warning and evaluating alternatives is difficult, time consuming, and inconvenient. It carries its own risks. So you carry on hoping for the best.

This is what you should know. The potential downside is too big to ignore—just like the engine light. There are very reasonable ways to address the risk. The universe of investment products is much broader than US stocks and bonds. With US stocks flashing the warning light, decreasing exposure there and adding other assets that can help your portfolio reliably support your retirement income for decades makes a lot of sense. Also, the accessibility and quality of those investments has greatly improved in recent years. They include international stocks, real estate, private investments, private credit, buffered ETFs, hedge fund strategies, and insurance products. Expand the choices and implement good investment management practices and you can get the dashboard warning light to turn off.

Act, or decide not to — but decide

Consider this article a prompt to look a little closer at your retirement portfolio and its exposure. If you are a savvy, do it yourself investor, you will know what that means. And if you don't have the time or the background to run that analysis yourself— after all, you spent your career being excellent at something else—consider working with a qualified advisor who will assess the risk and recommend adjustments. It is too important to ignore, just like that check engine light.

This article is for educational purposes and is not individualized investment advice.