Market Survival Guide: How to Navigate a Bear Market
6 Tips to Prepare and Survive
Bear Markets are bound to happen and no one knows (until after the fact) when they’ll end or where the exact bottom is, but how you act during these times can often have a bigger impact than your actual investment performance.
This post is designed to provide you with helpful pointers and proactive techniques you can use during a Bear Market as well as some methods on learning to embrace volatility as part of the process.
But before diving in, let’s first start by defining a couple financial terms.
What is a Bear Market?
Plain and simple, a Bear Market is when the stock market drops by 20% or more.
How common are Bear Markets and
How long do they last?
As you’ll see in the chart below, from 1926 through 2021, the S&P 500 Index has experienced 17 Bear Markets. Each decline has ranged in severity and on average has lasted about 10 months.
Image Credit Dimensional Funds
What causes a Bear Market to occur?
Each Bear Market is different than the last and the causes range from a slow or weakening economy, bubbles bursting (think 2008/09), pandemics, inflation, wars, political tension, and so on.
This time around, we have several major events all occurring simultaneously.
The war in Ukraine has led to a spike in items like your energy bills, gas prices and groceries
Continued COVID lockdowns are negatively impacting supply chains
Inflation in the US is running at a 40-year high and has caused the Fed to raise Interest rates
Each of these events alone would’ve shaken markets, however, these major events combined are creating lots of uncertainty about future growth.
Despite these negative events, it’s important to remember that as of May 2022, people are still spending money and taking vacations, unemployment rates remain historically low, and the housing market remains strong.
Let’s take a look at several important tips to remember when you find yourself in a Bear Market.
6 Tips to Prepare and Survive a Bear Market
starting with advice from Mike Tyson
“Everyone has a plan until they get punched in the mouth.” — Mike Tyson
Start with Your Why
Financial Planning 101: What are you investing for and when will you need the money back by?
Are you investing to buy a new car next year, saving for your kid’s college in 5 years, or is it for your retirement in 10-15 years?
Whatever the reason is, you first have to know what the purpose of your money is to be used for.
This your starting place.
Financial planning fundamentals tell us that there is a direct relationship between Time and Risk. The longer the time period before you need your money back, the greater risk you can afford to take on. The opposite is also true.
How does this apply today? If the only thing that has changed in your situation is the value of your portfolio … but not your time or your need for the money, then making drastic changes because Markets are down, could have a major negative impact on your retirement.
However, if circumstances have changed, and you now find yourself needing your money back sooner than anticipated, it may make sense to alter your investment strategy.
2. Time in the market > Timing the market
Research shows that the longer you allow your investments to go uninterrupted and remain invested, the greater likelihood there is at your investments performing positively.
In fact, in the history of the US Stock Market, there has never time where you would have lost money had you remained invested over a 20-year period.
Time is your biggest resource and your best friend when it comes to investing.
3. Diversification is King
Knowing what you’re invested in is crucial to your investment success.
Having all of your retirement dreams ride on one or two companies is a dangerous game to play.
By choosing to diversify, you spread your investments out across various sized companies, countries, and markets, so that your risk exposure to one type of investment is limited.
We do this to help reduce the overall volatility (negative impact) on your portfolio over time and in turn, also increase the possibility of achieving a higher return. It’s the best of both worlds.
This year, across Markets, diversification has looked like being down 10-20% depending on your portfolio as opposed to over 50-60% based on some of last year’s hottest growth stocks.
4. Avoid making knee-jerk, emotional, decisions
Emotions are a real thing and can often-times be your biggest downfall during a bear market.
Seeing your money disappear during a Bear Market can cause even the most disciplined investors to do irrational things and deviate from their plan.
Below is a chart that shows the average Investor Return vs. The S&P 500.
Logically, these two returns should be identical numbers but unfortunately. they’re not.
Why? You guessed it.
Emotions
Part of the value of having an Advisor is hiring someone to make objective, rational, unemotional decisions about your money.
5. Having Cash is like having Oxygen
How many times have you heard or said to yourself:
“I wish I would’ve bought more stock last year when the price was lower,” or
“If only I had the money, I would’ve bought.”
Everyone says it, but very few people actually invest like they say they are during Bear Markets.
Being prepared and having a war chest to draw from and invest into the market during times of uncertainty allows you to take advantage of discounted prices and do more with your money.
Remember, every day looks like a buying opportunity when you look back twenty years.
You don’t have to wait for the best time to invest, you just have to get started.
6. If you can’t beat ‘em, join ‘em: Tax-Loss Harvesting
Encountering a Bear Market is inevitable when investing for long-term wealth.
Much like the current of the ocean, when you find yourself in a force bigger than yourself, you have to stop fighting against it and learn to embrace it.
Learning to tax-loss harvest may be the smartest move you can make during times of market volatility and when you find yourself underwater.
If you find yourself experiencing significant investment losses, using the rebalancing technique of “tax-loss harvesting” within your non-retirement accounts will allow you to lower your tax bill by up to $3,000 per year. Certain conditions and rules apply to accomplish this, so it is best you do your research or consult with a financial professional.
Closing Thoughts on Navigating Bear Markets
Bears markets are never fun, they’ll test your conviction but they won’t last forever.
We understand that the financial markets are ever-changing and that is only exacerbated during a time when inflationary pressures are at the forefront. Therefore, it is important to have a well-diversified portfolio, know what you're invested in, and ensure your goals still match your portfolio.
As I've said before, financial planning is an ongoing process and your plan will shift, move and adjust as life and circumstances change
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