How worried should you be about a bear market?


This article was originally published on All figures quoted in US dollars unless otherwise stated.

To say that the first four months of 2022 have been turbulent from an investing standpoint would be an understatement. Stocks have been volatile since January and many portfolios are down significantly year to date.

But while it’s never fun to lose in the range of 10% to 15%, some investors are growing increasingly concerned over a fully-fledged, prolonged bear market. That’s when stocks fall 20% or more from a recent high.

Bear markets can be tough to endure and harder to recover from than stock market downturns that are more modest. But if you make these moves, you won’t have to sweat a bear market at all.

1. Make sure your assets are allocated appropriately

It’s one thing to have a portfolio that’s 80% stocks in your 40s or 50s. But it’s another thing to go that heavy on stocks in your mid-60s when retirement might only be a year or two away.

One of the trickiest things about bear markets is that it’s hard to predict how long they’ll last. Our most recent bear market, which happened in early 2020 on the heels of the COVID-19 outbreak, was fairly short-lived. But a bear market could last years.

If you’re nearing retirement, it’s important to keep a substantial portion of your assets outside of the stock market (such as in cash or bonds). But if retirement is decades away, you probably don’t need to make any changes to your asset allocation, even if stocks comprise the bulk of your IRA or 401(k) plan. That’s because you should, in theory, have ample time to recover from a downturn.

2. Shore up your emergency fund

Many people assume they’re doomed to lose money during a bear market. But if you leave your portfolio alone and wait for it to recover, you may not lose so much as a dollar.

That’s why it’s important to have a solid emergency fund — one that can ideally cover up to six months’ worth of essential living costs. That way, you’ll be less likely to land in a situation where you have to liquidate stocks when they’re down to access cash.

3. Stockpile some cash to invest with

Bear markets can be scary for investors, but they can also spell opportunity. Once you’ve beefed up your emergency fund, try setting aside extra cash for investing purposes.

When the stock market tumbles broadly, the value of quality stocks can drop as well. But that gives you a chance to scoop those shares up at a discount. You’ll need cash to make that happen, though, so do your best to free some up.

That said, don’t raid your emergency savings to scrounge up money to invest with. Doing so could lead to that same unwanted scenario of having to lock in losses should a need for money arise at a bad time.

Being prepared for a bear market could position you to get through one unscathed. And so rather than spend time fearing a bear market, set yourself up to get through the next one.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Source: Read More

We’ve Already Come Too Far To End This Now.

Subscribe To Our Weekly Newsletter

Get notified about new articles