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Five Strategies for Bear Markets

Updated: Jul 27, 2022

With markets down more than 20%, we are officially in a new bear market. While it is normal to feel uncomfortable as an investor in volatile and downward-trending investment markets, it is important not to allow discomfort to become panic. Consider taking these steps to be a better bear market investor:

1. Know that you have the cash to cover emergencies. If you're retired or planning on retiring, knowing that you have the next 12 months of living expenses in a bank account or money market fund—and a few more years' worth in bonds and bond funds—can help keep you calm and clear-headed.

Likewise, if you're still working, knowing that you have 3-12 months of living expenses in your emergency fund can help you focus on the long-term nature of your investment portfolio.

Even if you generally felt risk-tolerant before the bear market, if you haven't structured your investments to handle a sharp drop, you may have to make painful adjustments to your lifestyle when the crisis happens.

2. Match your money to your goals: Use a bucket approach to match your investments with what you're saving for. Money that you’ll need in the short term or that you can't afford to lose—the down payment on a home, for example—is best invested in relatively stable assets, such as money market funds or high-yield savings accounts. Near-term expenses may be more conservatively invested, and long-term savings for goals such as retirement may be more aggressively invested.

3. Zoom Out. Remember that downturns don't last. The average bear market lasted roughly 13 months. The longest of the bears was a little more than two years—and was followed by a nearly five-year bull run. The shortest was the pandemic-fueled bear market in early 2020, which lasted a mere 33 days. Unlike the brief COVID bear, we are already 165 days into this one and with current inflation, we’re all feeling its effects. When markets are down, take the opportunity to zoom out and remember that you're invested for the long-term, and long-term growth is always accompanied by short-term volatility.

4. Don't miss out by selling now and hoping to buy in later. In a recent study, Schwab found that stock investors had to stay invested at literally the lowest point of the market cycle in order to achieve the highest returns. Those who waited until the skies were clearer (e.g., investing a month after the low point of the cycle, or three months, or even six months) still participated in the recovery, but at a far smaller rate. Bear market recoveries are often front-loaded

Timing the market is very difficult—no one knows for sure when the bottom will come—so if you can tolerate it, riding out a bear market may be worth it.

5. Find a financial advisor you can trust. If you're not sure how to invest, spend, or save in these markets, or you think you'd be tempted to do something rash in a market slide, you should find a fiduciary financial advisor you trust to collaborate with you. An experienced advisor help you create a comprehensive financial plan and help prepare you and your portfolio for times when the market gets tough.


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