In this article, we’re sharing five tips for surviving a bear market.
By Richard W. Stout III and Thomas Britt
It’s been a trying year for investors so far. In June, the S&P 500 Index officially, albeit temporarily, entered bear market territory. The index then went on to return over 9% in July, marking its strongest month since November 2020. Meanwhile, record-high inflation continues, and interest rates are on the rise.
Indeed, recession fears are mounting as investors grow increasingly concerned about the Fed’s ability to achieve a soft landing. Yet the fate of the U.S. economy may ultimately depend on variables outside of the Fed’s control—for example, Russia’s ongoing war in Ukraine and global supply chain disruptions.
No one can predict with certainty how the rest of this year will unfold. However, since World War II, the U.S. has experienced a bear market about once every 5.4 years. Meaning, no matter what the future holds, long-term investors would be wise to prepare for the possibility of a major market downturn.
Consider these five tips for surviving a bear market (and thriving over the long run):
#1: Focus on What You Can Control
Experience has taught us that long-term investors can be financially successful no matter how the market behaves. In other words, surviving a bear market comes down to focusing on what you can control—and ignoring what you can’t.
Here are a few examples of things you can control:
- Savings rate
- Retirement plan contributions
- Asset allocation
- Risk management
First, consider giving your emergency fund a boost. Indeed, volatility and an uncertain economic future can affect more than just your investments.
A downturn may also mean layoffs, downsizing, and restructuring as companies revise their growth expectations. Having extra cash on hand can help you weather a potential financial setback without going into debt or prematurely dipping into your retirement funds.
Most financial planners suggest saving enough cash to cover at least three to six months’ worth of living expenses. However, depending on your circumstances, you may want to save more than the rules of thumb suggest.
Retirement Plan Contributions
Volatility can be scary, especially for those in or approaching retirement. As you watch your account balances fluctuate, you may feel the urge to pull back, stop investing, or even go to cash. Yet when it comes to surviving a bear market, attempting to time the market rarely produces better results than staying the course.
One way to stay on track towards your goals is to automate your retirement plan contributions. Continuing to contribute during a bear market – or even increasing your contributions – will position these dollars for growth when the market rebounds.
Asset Allocation & Risk Management
Asset allocation refers to the mix of investments you hold based on your financial goals and tolerance for risk. Studies show that asset allocation can be one of the biggest determinants of portfolio performance over time.
As asset classes perform differently, your portfolio can drift from its target asset allocation. Depending on how far it drifts, your portfolio may be too risky—or not risky enough—to achieve your goals.
We periodically rebalance your portfolio to its target weights to help ensure you’re not taking on unnecessary risk in the event of a bear market. This can also help ensure you’re well positioned for the ensuing recovery.
#2: Look for Tax Planning Opportunities
It’s never fun to watch your investments lose value, even if the losses are only on paper. However, surviving a bear market may mean taking advantage of the tax planning opportunities it often creates.
For example, you may want to consider harvesting losses to offset capital gains and reduce your year-end tax bill.
Selling an investment that’s worth more than what you originally paid for it results in a capital gain. In most cases, this gain is subject to your ordinary income tax rate or the capital gains tax (assuming you don’t hold the investment in a qualified account).
At the same time, you can sell investments that have declined in value below your cost basis to lock in losses. You can then use these losses to offset capital gains and reduce your tax liability. You can also carry unused losses forward to future years, making this a useful strategy even in years you don’t have gains.
Another tax planning strategy to consider during a bear market is a Roth conversion.
The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. The amount you convert is taxable at your ordinary income tax rate. Thus, taking advantage of this strategy during a bear market may help minimize what you owe Uncle Sam.
On plus side, any future withdrawals you make from a Roth IRA are tax-free, assuming you’re at least 59 ½ years old and meet the 5-year rule. Moreover, Roth IRAs have no required minimum distributions (RMDs). That means your funds can continue to grow tax-free throughout retirement until you need them.
While potentially valuable, tax-loss harvesting and Roth conversions can be complex tax planning strategies. A trusted financial advisor or tax professional can help you determine if these strategies make sense for you.
#3: Keep Bear Markets in Perspective
Market downturns can be hard to stomach, no matter how much investing experience you have. Nevertheless, surviving a bear market often requires investors to maintain a healthy perspective.
First, it’s important to remember that bear markets are normal. According to research from Hartford Funds, the S&P 500 Index has had 26 bear markets since its inception. On the other hand, there have also been 27 bull markets. While stocks lose 36% on average in a bear market, they gain 114% on average in a bull market.
Meanwhile, bear markets tend to be short-lived compared to bull markets. The average length of a bear market is 289 days, compared to 991 days for the average bull market. Over the last 92 years of stock market history, bear markets have comprised only slightly more than 20 of those years.
In other words, throughout history, stocks have risen 78% of the time. Remembering that stocks tend to rise far more often than they fall may help you keep challenging markets in perspective.
#4: Be Aware of Your Emotional Biases
Human beings are hardwired to make emotionally driven decisions. Unfortunately, emotional decision-making can be problematic when it comes to surviving a bear market.
The negative emotions you may experience in a bear market can leave you susceptible to overstating the risks of the situation because you are gauging it based on the strength of your feelings. Your fears may be amplified by stories of how bad things are and how much worse they may get. This can compromise your ability to assess the likelihood of future developments, with the strength of your feelings outweighing the strength of evidence.
Do your best to avoid whatever it is that provokes an emotional response. Turn off financial market news and check your portfolio less frequently. Avoid lengthy “what-if” conversations with people about the market and what may or may not happen next. It’s also wise to hold off on making any investment decisions, as these will likely be driven by the feelings you are experiencing.
Keeping your emotions in check can be challenging, especially when it comes to your money. But it’s not impossible—even in a bear market.
One of the best ways to avoid the pitfalls of emotional investing is to stick to your long-term financial plan in good times and bad. A comprehensive plan for your wealth removes emotion from the equation, so you can make smart decisions for your family and future.
#5: Surviving a Bear Market May Mean Asking for Help
Finally, if surviving a bear market feels like more than you can handle on your own, consider enlisting the help of a trusted financial advisor like Benchmark Wealth Management. We can help you develop a financial plan and investment strategy to keep you on track towards your financial goals. Additionally, we proactively recommend strategies to help you minimize your tax bill and ultimately achieve financial freedom.
To learn more about how we may be able to help, please contact us. We’d love to hear from you.
The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information, and it is not to be construed as specific investment, tax, or legal advice
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. He earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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