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10 Steps To Consider When Investing in a Bear Market

Bull markets are the happy times.

For investors, those periods of extended market increases could mean new investment opportunities, S&P 500 surges, and favorable returns for those who make the right buying and selling decisions.

And more often than not, bull markets are the Wall Street status quo. Over the nearly 100-year history of the S&P 500 Index, bull markets have ruled the day for almost 90% of the past century.

But what about that other 10%? When securities prices tumble 20% or more for over two months, we’re officially in a bear market. While bull markets generally last over 6.5 years with average cumulative returns of almost 340%, bear markets usually last less than 18 months – but have seen average cumulative losses of nearly 40% for stricken investors.

And once again, storm clouds are gathering. The more than decade-long bull market following the 2008 financial crisis is considered by many to be over. While a one-month bear market in early 2020 reversed course quickly, the current bear market that began in June 2022 seems poised to stay a while.

While the two prolonged bear markets since 2000 lasted almost 2.5 and 1.5 years respectively, the unique conditions surrounding this current downturn – including high inflation, interest rate hikes, international strife, and fear of an oncoming recession – make predicting how long it will last virtually impossible.

Yet despite that grim outlook, bear markets are no time for panic.

While we don’t know when the current bearishness will specifically end, we do know that eventually it will improve. Every bear market of the past century has been followed by another bull run, sometimes even sending stock indexes to new highs. So rest assured … the sun will eventually rise again.

A bear market also doesn’t mean it’s time to pull your money out of your portfolio. It does, however, mean investors should be more careful about the choices they make while navigating these choppy waters.

A bear market doesn’t mean it’s time to pull your money out of your portfolio. It does, however, mean investors should be more careful about the choices they make while navigating these choppy waters.
Tracy Gallman

For the concerned investor who can’t watch a stock ticker like a hawk, here are a few important steps to consider for protecting assets, safeguarding your future, and possibly achieving return goals even while the bears are loose.

Focus on What You Can Control

  1. Re-evaluate the amount of cash in your emergency account.

    How many months of expenses do you have saved in cash? Hope for the best, but prep for the worst. Even if it feels unlikely, be ready in the event of a layoff or job loss. Keeping those funds in a rewards-bearing account like an Axos Rewards Checking account can also help maximize that money’s effectiveness, whether it’s strictly standing by for emergency use only – or waiting for a golden investment opportunity.

  2. Review your cash flow.

    Will your income take a dip with a prolonged downturn? Are there any expenses you could cut from everyday spending? With no way to know exactly how long the current conditions could hold, making smart choices about seemingly minor expenses now could pay off big if the downturn persists or worsens.

  3. Continue investing.

    Although it seems counterintuitive, now is actually a great time for the long-term investor to put capital to work – and maybe even purchase securities that offer strong current value. Today, you can buy into a market that is priced at around a 20% discount from just six months ago.

Stick With Sound Investing Principles

  1. Stay diversified.

    A good strategy is to have exposure to cash, equities, and fixed income in your portfolio. How much you allocate to each asset class will ultimately be a function of your personal time horizon, risk tolerance, tax bracket, and income needs. Maintaining a cash balance can potentially provide peace of mind and may help you avoid feeling pressed to liquidate assets at inopportune times.

  2. Keep some exposure to equities.

    Want to fight inflation? Equities have traditionally appreciated at a rate greater than inflation over the long term, helping to address rising prices and longevity risk at the same time. Tools like TipRanks (available with Axos Elite membership) can also make it easier to monitor market activity and research your next move.

  3. Understand the distinction between risk tolerance and risk capacity.

    They sound similar – but at their core, they’re very different concepts. Risk tolerance is the measure of how much risk you are willing to take on. Basically, how much risk can you live with and still sleep at night. Meanwhile, risk capacity is the level of risk you should take. That's an objective determination of the level of risk you need in your portfolio now to successfully reach your long-term financial goals. Factors like time frame/time horizon, cash flow, income requirements, debts, insurance, and liquidity will all help determine your specific risk capacity.

For Those in or Near Retirement

  1. Consider your time frame for retirement.

    Are you 10 to 15 years away from needing distributions from your investments? Or is it closer to five to seven years? Those with shorter time frames may need to consider the risks of investing in down markets vs. their projected income needs.

  2. Make sure your strategies are specific and customized to you.

    Stop following the paths of others; begin thinking about what’s best for your unique situation. Make sure your investment plan is tailored to focus directly on your individual wealth, life status, and holdings (longevity, health, tax status, career enjoyment, etc.).

  3. Income can be key.

    This one is fundamental, but it bears repeating: Have a retirement budget and know exactly how you’re funding this budget each month. Consider using financial tools designed to provide income and principal protection, such as CDs and dividend-paying vehicles for a portion of your wealth.

  4. Consistency helps too.

    If you have the means, consider setting up a schedule for moving money into your investment account on a regular basis. Periodic automatic investing through an app aide like Axos’ Auto Deposit Scheduler can sync up your regular investment to pay periods, days of the month, or whenever you choose.

Keep Your Eyes Open

Just like the stock market in the best of times, no amount of consideration and planning can ever completely insulate you from the tosses and turns of a global economy. However, paying close attention to investing touchstones during high-stress periods (while also keeping your emotions in check) can help ensure the bears don’t trigger your own “fight or flight” response – and keep you better protected until the bulls return.

Views expressed are as of August 15, 2022, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, as applicable, and not necessarily those of Axos Invest. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

A Managed Portfolio at Axos Invest could help support a long-term approach, even during bear markets. After answering a few questions, it recognizes your unique situation and manages a risk-based, low-cost portfolio of ETFs for you.


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