To say the first four months of 2022 have been turbulent from an investment perspective would be an understatement. Stocks have been volatile since January and many portfolios are down significantly since the start of the year.
But while it’s never fun to suffer losses in the 10% to 15% range, some investors are increasingly concerned about a full-fledged, protracted situation. bear market. This is when stocks fall 20% or more from a recent high.
Bear markets can be tough to bear and harder to overcome than more modest stock market declines. But if you make these moves, you won’t have to sweat a bear market at all.
1. Make sure your assets are properly allocated
It’s one thing to have an 80% stock portfolio in your 40s or 50s. But it’s another thing to invest so much in stocks in your mid-60s, when retirement maybe only a year or two away.
One of the trickiest aspects of bear markets is that it is difficult to predict how long they will last. Our most recent bear market, which occurred in early 2020 on the heels of the COVID-19 outbreak, was fairly short-lived. But a bear market could last for years.
If you’re nearing retirement, it’s important to keep a significant portion of your assets outside of the stock market (like cash or bonds). But if retirement is decades away, you probably don’t need to change your asset allocation, even if stocks make up the bulk of your IRA or 401(k) plan. Indeed, you should, in theory, have enough time to recover from a slowdown.
2. Boost your emergency fund
Many people think they are doomed to lose money during a bear market. But if you leave your wallet alone and wait for it to recover, you might not lose a dollar.
That’s why it’s important to have a solid emergency fund, which can ideally cover up to six months of essential living expenses. This way you will be less likely to land in a situation where you have to liquidate stocks when they are down to access cash.
3. Store money to invest
Bear markets can be scary for investors, but they can also mean opportunity. Once you’ve built up your emergency fund, try setting aside some extra cash for investment purposes.
When the stock market crashes, the value of quality stocks can also fall. But it gives you a chance to grab those stocks at a discount. You’ll need money to get there, so do your best to free some up.
That said, don’t loot your emergency savings to find money to invest. This could lead to the same undesirable scenario of having to lock in losses if a cash need arises at the wrong time.
Being prepared for a bear market could get you out of it unscathed. And so rather than spending time fearing one bear market, get ready to ride through the next one.
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