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  • Writer's pictureErin

How to Get the Most Out of a Bear Market

News about inflation, recession, and other current economic events may leave you feeling stressed, but market mood swings don’t have to get you down! There are many ways to cope with the often frustrating changes that often come with market downturns.

Thankfully, it’s very true that having a plan and educating yourself about what to expect can bring immeasurable relief. We’ll share our favorite tips for how to prepare for, effectively weather, and even potentially benefit from a bear market — no matter your level of financial savvy.

First, What Is a Bear Market?

So many terms are used — some interchangeably — to define economic patterns that it can be hard to keep track of which is which. Below, we’ll define a few of the more common terms you’ve likely heard being used recently.

  • Bear market - a bear or “bearish” market refers to a prolonged downward trend in the stock market, which is noticeable when prices of stocks and other securities decline and continue to show an ongoing downward trend for a length of time (usually a decline of 20% or more).

  • Bull market - the opposite of a bear market, a bull or “bullish” market refers to an overall upward or positive trend in security prices and other market values.

  • Recession - Investopedia defines a recession as “a significant, widespread, and prolonged downturn in economic activity.” The generally accepted rule for defining a recession is two consecutive quarters of decline in GDP.

  • Gross Domestic Product (GDP) - GDP is the most common term you’ll hear when economists and others are discussing the total value of a country’s domestically produced goods and products within a certain time frame. Investopedia compares it to a kind of scorecard that summarizes a country’s financial health.

Now that you have a better understanding of the terms above, we can dive into how to survive a bear market until it turns bullish again… or at least levels out a bit!

Don’t Panic!

In a bear market, one of the least helpful ways to react is panicking. However, we know it is challenging to push anxiety surrounding downward market movements to the side. Feeling some degree of concern about investment balances contracting is normal, but it is imperative to not let that feeling control your actions.

Panic during a bear market often leads to making rash decisions, like liquidating investments that are meant for the long-term. Moving to “cash” — a perceived safe place for money when the market is in turmoil — may seem like the right move, but that is based on fear, not fact. And doing so when the market is down means you are locking in losses instead of riding out the inevitable wave of fluctuations. When investors panic and sell during a bear market, it makes it that much more difficult to benefit from the upswing a bull market offers after the bear subsides. Keeping the panic at bay helps avoid this all-too-common investment blunder.

Focus on Careful Budgeting & Saving

For many, the correlation between a solid budget and a downturn in markets is not immediately clear, but the connection exists. When a strategic budget is in place — preferably one that includes setting aside funds for an emergency and other goals — a bear market feels less worrisome. That is because knowing where money is going once it comes in lays the groundwork for a more stable financial footing.

During periods when the market is a rollercoaster, go back to the basics of financial planning. Take a moment to evaluate your cash flow and where your money is being spent, and make adjustments as needed. Is there wiggle room to boost savings by cutting or reducing other expenses? Is there an opportunity to be more mindful about spending in discretionary categories, like going out to eat or travel? A bear market presents an opportunity to shift focus away from the headline-grabbing stock market and instead put your attention and energy toward the basics.

Work with a Financial Professional for a Customized Plan of Action

Another way to lessen the blow of a bear market is to work with a trusted advisor to design, implement, and adjust your financial plan. Although we may be a little biased when it comes to getting professional financial guidance, it can make a world of difference when investment balances are shrinking.

Not only can an advisor provide informed insight into the markets and what may be driving a downturn, but they can and should also offer a helpful perspective and ongoing support during turbulent times. An advisor can assess your financial situation and goals for the future and help you determine what the next steps should be.

In a bear market, that may mean adjusting investments to reflect updated risk tolerances, or it could mean adjusting the timeframe for reaching certain goals. In other cases, an advisor’s help during a bear market may come down to helping you stay the course. Without the same emotional attachment to your money, an advisor’s perspective can be an invaluable tool to have during a negative market cycle.

Evaluate Your Risk

A bear market often prompts investors to take a closer look at their investment mix. In doing so, though, it is necessary to remember a few key points. First, a spectrum of risk exists, meaning there are investments that run the gamut from conservative to highly aggressive. How much risk an investor takes on should be tied to their tolerance for market volatility and losses over time. However, that is not the only driving factor.

Timeframe for an investment should also play a role in how much risk is considered and ultimately taken on in a portfolio.

If you aren’t sure where your risk tolerance lies, start by evaluating how comfortable you feel with market downturns. In a bear market, are panic and anxiety afoot? If so, it may be beneficial to adjust your risk tolerance to reflect your comfort level more accurately. It is equally important to evaluate your timeframe. A longer window of time before those investment dollars are needed provides an opportunity to ride out bear markets without making significant portfolio changes. A shorter window may mean adjusting risk down so that when money is needed, it isn’t subject to as much volatility as a higher-risk investment mix.

Once you’ve evaluated your risk tolerance and timeframe, review your investment holdings to ensure they meet those criteria. If you aren’t sure where to start, get in touch. We can provide a risk assessment that shows where your investments stand on the risk spectrum and make recommendations for adjusting as needed.

Downturns Don’t Last Forever — How to Be Ready for a Market Upswing

Markets are cyclical, which means that after a bear market, a bull market may materialize. When markets are back on the upswing, many investors who moved their investments to a more conservative mix to avoid the downturn are likely to miss out. Those who stayed the course and left investments in the market to ride out the wave may be curious when to invest more. The reality is that no one has a clear view into the future, so predicting when the upswing will take off is nearly impossible. However, investors can prepare themselves for a positive turn in the market in a few ways.

The best way to get ready for a market turnaround is to recognize that buying into an investment during a bear market can be a smart move under the right circumstances. It likely seems counterintuitive to buy when everything is falling, but in the investment arena, this is one way to take advantage since stocks, mutual funds, and other investments are more likely to have a lower share or purchase price when the market is down. Buying at a lower price means you are able to buy more shares with the investment amount. Over time, as markets move in a positive direction and investments grow, those few extra shares purchased during a downturn can have a positive impact on the growth of an investment.

In addition to buying into an investment during a downturn, investors may also benefit from dollar-cost averaging money into their investment portfolios. Dollar-cost averaging refers to the process of incrementally adding to an investment account over several months or even years, instead of investing a single lump sum in one shot. Spreading out investment contributions this way takes away the need to time the market. Instead, an investor may get shares at a slight discount one month thanks to a bear market, and a slightly higher cost the next. That may seem nerve-wracking to some, but this strategy often results in a lower average share price than when investing a lump sum.

Bear Market Strategies: The Bottom Line

Bear markets are not the end of the world where investments are concerned. In fact, they are to be expected from time to time! Fortunately, negative performance in the market presents an opportunity for many to review and adjust their financial strategies. Start by leaving your emotions at the door, if possible! Panic and anxiety don’t produce great outcomes in the market and often lead to rash decisions that aren’t easy to come back from. Getting back to the basics with budgeting and saving can also be a smart strategy during bear market seasons.

Additionally, investors should take the time to review their risk tolerance, timeframe, and the “why” behind an investment to ensure any current investment mix aligns with their own current needs. If you aren’t sure where to start or want other ideas for how to take advantage of a bear market, get in touch with us today. We can offer a risk assessment and evaluation of your current financial and investment goals to determine if you’re best positioned, regardless of market performance.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. EViE Financial Group and Cambridge are not affiliated.

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