The Bearer of Not So Bad News

Bear market. You probably heard this headline around somewhere recently. It’s hard to escape from it all over your news and social media. If this is news to you, you’ve probably been living under a rock, which honestly isn’t such a bad thing. Headlines about bear markets can cause people to make rash decisions with their money. But are down markets ALL that bad? I hope by the end of this newsletter not only will you get a better understanding of them, but also can embrace it to be a part of your investing journey. Now before I dive into this, I want to lay out something very clear.

BEFORE YOU READ

Many of the educational principles and information I’m about to share is really targeted at the long-term investor. If you are about to enter retirement, are currently in retirement, or need your funds soon, your strategy?most likely will look different due to your short-term time horizon. For real guidance on what to do for your situation, please reach out to a financial professional. Bad decisions from short-term changes can completely change the course of what you’ve planned for years, so make sure to consult with a professional during a down market. ?And with that being said, let’s dive into this.

WHAT IS A BEAR MARKET?

Let’s first understand where we’ve been for a long time: a bull market: A bull market is simply a period where prices are rising. Bear markets are the opposite and are a prolonged period where prices exceed at least 20%. Not only is this a decline, but it’s usually a very sharp decline fueled by "panic selling" in a short period of time. You will also find more economic terms thrown around such as the following:

• Correction – A drop that’s at least 10%
• Recession – When an economy experiences negative performance for at least 6 months
• Depression – When an economy experiences negative performance for a number of years and is much more severe

You will likely hear these words being tossed around more often when bear market fears are circulated. So far, the current market has at least hit a correction and potentially entered a bear market and/or recession (it’s not officially confirmed by textbook definition). While this might seem worrying at first, there are three important historical?facts to consider.

5 HISTORICAL FACTS ABOUT BEAR MARKETS

1. Bear markets have occurred every 3.6 years.
2. Of the 29 bear markets that occurred in 1929, just 15 have resulted in a recession.
3. The average length of bear markets is 9.6 months, but bull markets have averaged 2.7 years.
4. Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market.
5. On average, stocks have historically lost 36% in a bear market. During bull markets, stocks have historically gained 114%,

How has this resulted performance-wise with the stock market? Here’s a recent look from JP Morgan’s analysis via Guide to the Markets (April 30, 2022). Its data shows how markets have annually performed relative to their lowest market drop that year. The point being is that bear markets are more normal than we realize and markets have stayed strong over time despite them.

WHAT ARE THE OPTIONS?

Bear markets both present both a wake-up call and even an opportunity. So what options are available?

Reassess Your Risk

For a lot of people, market fluctuations can make them feel uneasy, especially for a long period of time. Given the sudden change with the recent volatility, it’s a good opportunity to understand what you can stomach. There is a reminder I like to provide to people during fluctuations. Ask yourself one question: “When do I need my funds by?" Funds with a short time horizon shouldn't be too exposed to a volatile environment. On the flip side, a long time horizon favors those who spend more time IN the market. Remember, bear markets happen frequently, but bull markets have historically on average lasted almost 3 times longer. That’s why you always hear people (including yours truly) preach time IN the market. More time has been spent on bull markets and each cycle continues?to get harder to time.

Diversification

There is a simple fact about diversification; it helps preserve funds. Diversification may limit your ceiling since you are not as concentrated in a few positions that would have massive upside. However, doing so spreads the risk and therefore can help limit your downside too. There are different forms of diversification that can be factored whether by sector, asset classes, other economies, and more. Keeping funds diversified builds a solid cushion that makes the short term easier to ride to stay committed for the long term.?It’s one thing to say you will invest for the long run, it’s another to actually experience it with real-time volatility in between. Diversification can help throughout the journey.

Maintain Your Cushion

Should markets fall are your safety reserves intact? This is where the value of an emergency fund comes into play. It may be getting beaten by inflation staying liquid like cash, but it helps prevent downside risk in the short term. Your emergency funds contain the word "emergency" for a reason: it's supposed to be a safety resort. Make sure you have a solid safety reserve on the side when the going gets rough.

Tax Opportunities

One of the interesting points to note about down markets is that they can present opportunities for tax savings. An example of this is tax loss harvesting. Investors are allowed to deduct $3,000 in net capital losses every year from taxable accounts like a brokerage. We say "net" because you can offset both your losses and your gains into this total. Anything over $3,000 would get carried over to the next tax year. This strategy is commonly applied to individual securities but can present an opportunity when looking to reallocate your portfolio while getting a tax benefit from it. If you participated in a very risky position with a massive loss that you don't have the confidence in, this opens that option. Another example is Roth conversions. This is a process where you take pre-tax money (Ex. 401k, Traditional IRA) and "convert" it to post-tax money (Ex. Roth 401k, Roth). Doing so results in paying taxes that were otherwise deferred. So why is this important in a down market? The idea behind it is that if the account values drop a significant amount, there is a smaller total value to convert and therefore fewer taxes to pay during the conversion (partial conversions can be done too). Then the amounts inside the Roth account would rebound and grow tax-free now. Both of these strategies are complex since everyone has different tax rates with different time horizons, so please consult with a tax professional before considering these.

Don't Change Anything

Sometimes one of the best things an investor can do is just not change their plan. Short-term changes can have long-term impacts. If you've committed to a long-term strategy, making few to no changes during volatile times could be one of the best decisions you might make. This is also more reason to review and revisit your goals periodically so you can remember why you've committed in the long run. Doing so can make the process easier to endure when you understand the "why" behind your strategy and only make necessary changes during your scheduled reviews. Continuing with your current strategy could be one of the best decisions you've made.

Ask for Help

There is one truth about building wealth: it's a team effort. Whether?that’s?with a friend,?spouse, or financial professional, you need people?to guide you through your journey. It helps you stay on course, commit?to your long-term goals, and stay optimistic for the future. Bear markets are normal. And it's important we learn to embrace them for the long-term investing journey.

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