Unlocking Opportunities: Actionable Steps for Investors in a Bear Market
It’s officially official. The S&P is in bear market territory, having crossed the arbitrary line in the sand. Pundits can now move on from “is a bear market coming” to “how bad will it be” and “how long will it last.”
If this is your first bear market, it won’t be your last, so pay special attention to how you feel, act, think, and cope. If this is not your first bear market, try to remember how painful the others were and the feeling of despair. But remember, we recovered.
I’ve invested through several bear markets. I was a total noob, riding the high of beginner’s luck when the global financial crisis struck. It was a gut punch. I could have let that negative experience deter me from investing — citing corporate greed, a stacked deck, or crony capitalism as reasons I couldn’t succeed as an investor. Instead, I decided to learn from it.
As another bear market arrived, the holiday season of 2018 wasn’t cheerful for investors. It was short-lived, though, recovering in just a few months. And then came the covid crash. Talk about swift — the 35% decline and full recovery played out in six months while we were locked in our homes binge-watching Netflix and ordering from Amazon.
Mania followed. With the Federal Reserve standing guard, protecting us from risk, we partied HARD! Surviving the previous bear markets has better prepared me for this one. Don’t get me wrong — it still feels terrible, but I know I can grin and bear it.
A bear market is humbling. It tests your conviction and your ability to follow through on things you say when all seems well, like “I can handle a pull-back,” “I won’t panic sell,” and “I understand volatility.”
Those comments emerge while dancing to loose monetary policy, fiscal stimulus, and upward earnings revisions. But then the music stops. Even if brief, the silence feels like an eternity. We all stand around nervously, watching like middle schoolers at a dance, waiting for Usher to start up again.
During moments of fear, our nature tries to assume command. We second guess our strategies, and our imaginations run wild, concocting Armageddon-like scenarios. While that’s occurring, we’re also experiencing moments of rationality, proposing we put some cash to work or increase contributions while good companies are on sale. It’s like a real-life battle between the cartoon angel and devil on our shoulders — fighting over our financial future.
It’s not easy to invest in these moments. We don’t know how long they will last. I still hear stories from investors scarred from the financial crisis — they were able to stay in the market for months and months before finally bailing towards the bottom, missing the recovery completely. Because of those stories, I fight to keep my clients in the market, even during the darkest days (which are often right before dawn).
A bear market isn’t a time to panic, but it may provide an opportunity for action. There’s no silver bullet, but there are tools that might make sense for some investors.
Here are some things to consider during a bear market:
Keep Buying: I’m encouraging my clients to put cash to work (if they can afford to). Ironically, when stocks are most attractively valued, investors want them the least. I’m not trying to time the market — it could get worse from here. But adding over the next several months will likely feel good two to three years from now, even if it’s painful today.
Tax-Loss Harvesting: when you sell investments at a loss, you can offset gains (or future gains if you don’t have gains in the current year) with those losses, lowering your burden to Uncle Sam. You can replace the investments with similar investments to maintain a similar portfolio as before (to avoid violating wash sale rules). Tax Loss Harvesting is a tool that shouldn’t undermine the overall investment goals and strategies.
Rebalance: volatile markets can shift portfolios away from their intended allocation targets. A bear market can be an excellent time to reset to those targets while minimizing realized gains.
Roth Conversions: there’s always a silver lining, and for many investors, down markets are the perfect time to execute Roth conversions and create some tax savings. A traditional IRA is a tax-deferred vehicle funded with pre-tax dollars. Conversely, a Roth is funded with after-tax dollars, meaning you pay taxes upfront. When you convert funds from a traditional to a Roth, you’ll have to pay taxes on the amount converted. When portfolios are down, the taxes owed will be lower since the total conversion will be smaller. It’s essential to weigh the costs and benefits of a traditional and Roth IRA before executing a conversion.
In his book The Intelligent Investor, famed investor Benjamin Graham talked of a hypothetical investor, Mr. Market. Each day, Mr. Market offers to buy or sell you stock at a price based on his mood — and boy was he moody. Mr. Market was driven by euphoria, fear, panic, and apathy, a real manic-depressive. Many investors can relate to Mr. Market, but wild emotional swings from pessimistic to optimistic aren’t good for your mental health or returns. It’s up to us, as rational investors, to avoid Mr. Market’s plea for emotional decisions.
For years, investing has appeared very easy — it’s felt like markets always go up. They don’t, and that’s why there’s a reward for those with the discipline and courage to live up to the name “long-term investor.”
I know sometimes my optimism might be nauseating, but it’s the only way I know to be — and over the long-term, it pays. Bear markets aren’t fun, but they’re normal. As the headlines worsen and the alarmists get louder, challenge yourself to act like a long-term investor, not a short-term trader.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
