Securing Your Future in a Bear Market
If you’ve been paying attention to the market these last few months you’re well aware that we’re currently in not so great financial times. Unfortunately, bear markets, defined as a sustained period of time where stock prices fall more than 20, are just a part of investing. The last bear market we went through occurred in March 2020 when the market fell -37% at the start of the COVID-19 pandemic. Thankfully, following that downturn was a bull market that lasted until the tail end of 2021.
Now in 2022, we’ve been experiencing a bear market. Since the start of January 2022, the S&P 500 index hit a new low, falling nearly 20% from its record high (1). Surging inflation, the war in Ukraine, and continuous supply chain interruptions have all contributed to the declining market. Historically, there have been 29 bear markets since 1929 with the longest bear market on record lasting 630 days between January 1973 to October 1974. (2) While this seems like a long time (and to some it is), for long-term investors like myself it’s really just a blip in time.
If you’ve been in the game long enough, you’ve been through your share of bear markets and know that they too will pass and a bull market will follow. However, it’s easy to get caught up in the apocalyptic media frenzy and pull your money out to avoid future losses. At the end of the day, your money is your own and how you choose to invest is your choice. But, before pulling out all your funds at a loss, think about doing these five things to secure your future in a bear market.
1. Evaluate your cash reserves
While recessions do not always follow bear markets, it is possible that the economy is ready to face a downturn. For many, these economic downturns are followed by mass lay-offs. Investing is king (at leas tin my book) but you should always have some kind of cash reserve. During normal times it’s recommended to have at least 6 months worth of expenses stashed away but in anticipation of a possible recession, bumping that up to 10-12 months is probably a good idea just in case. Not sure where to start? Check out our savings challenges to help kick start that savings account.
2. Re-visit your financial objectives
Every time we set financial objectives, we also set a timeline (at least I hope you do). For example, in my case, my husband and I have set a down payment goal to be achieved in two years time. Bear markets can serve as a great interruption. Our goals were based on a certain return in a given time frame which is now overshadowed by a market that has fallen 20%. Re-visit these financial objectives and determine if they’re still feasible. Often time, they just require a little re-arranging. For example, if your goal is to buy a home, can you wait an additional year? This is a time when investors see their money as “dead” meaning it’s not working particularly hard for them which can be discouraging and may require you to take a step back evaluate what you want to achieve and how you plan on getting there.
3. Secure your income
Securing your future in a bear market is highly dependent on your income. For many of us, that future is often uncertain when hard economic times hit. Ensuring you have a sustainable income will be key. Strengthen your industry connections, network, or even start a side hustle. The more income streams you have, the more secure you’ll be in a bear market.
4. Reconsider your withdrawal rate (if you plan on retiring)
For those of you that are planning on retiring, this is a good time to reconsider your withdrawal rate. The average withdrawal rate is 4%. With the 4% rule, you add up all of your investments and withdraw 4% of that in your first year of retirement, adjusting for the rate of inflation in every subsequent year. In more uncertain time, brining that down to 3% maybe provide more stability (even if it’s just emotionally).
5. Stay the course
One of the hardest things to do during a bear market is stay the course. When the market dips, investors panic, selling off their investments and bringing prices down further. However, remember that a market correction is an opportunity to buy great companies at a lower than average cost. Famous American businessman Shelby Cullom Davis once said “You make most of your money in a bear market, you just don’t realize it at the time.” Maintaining the emotional fortitude to keep going through a bear market is what separates the real investors from those who buy the hype. Historically we’ve gone through many bear markets, all to be followed by bull markets. I don’t say this as a way to soothe fears because at the end of the day I can’t predict the future. However, as history has taught us, the market will eventually go back up, and pulling out investments out of fear will prevent you from realizing the gains that will soon come.
Bear markets can be a scary time. Remember, investing is dependent on both your financial ability to set aside money and your emotional fortitude to withstand the ups and downs. With the right information and a boat load of patience, you’ll likely come out positive in the end. And if it makes you feel any better, once you’ve been through one bear market, you’ve been through them all.
Sources:
(1) S&P 500 Hits New 2022 Low As ‘Staggering’ Market Losses Continue. Sergei Klebnikov, May 12, 2022.
(2) The Complete History of Bear Markets. Kimberlee Leonard. May 10, 2022 https://seekingalpha.com/article/4483348-bear-market-history