It's widely accepted that the U.S. has entered a bear market when a broad market index like the S&P 500 falls 20% or more from its most recent high. While bull markets (when the market improves by 20%) are more fun for many, bear markets offer opportunities you won't find when the bulls are running.
Chances are, if you've been investing for a few decades, you're intimately familiar with bear markets and understand that they come and go. Still, a bear market can feel scary, especially if you're counting on your portfolio to help you cover daily living expenses.
Here's what you need to know the next time a bear market rolls around.
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It's time for a review
For most people, every dollar counts in retirement. If the value of your portfolio is dropping like a rock, it's time to take a fresh look to determine whether you might benefit from rebalancing. Moving some money into more conservative assets could help protect against further loss.
It's your chance to be strategic
If you liked strategy games as a kid, you're in luck. There's no time like a bear market to put those strategic skills to use. While others are dumping and running, you have an opportunity to scoop up great stocks at a bargain price. Once the market begins to rebound, you'll have those new (bargain-priced) assets in your portfolio and can enjoy watching them grow.
A cash reserve can act as a lifesaver
If you don't already have one, consider building a large enough reserve of cash or cash equivalents to cover living expenses for several months. Let's say your monthly bills are $4,000 and you receive $2,000 in Social Security benefits, $250 from an annuity, and $750 in profit from rental property. That means you have $3,000 in guaranteed income and only need $1,000 more to cover expenses.
The goal is to avoid making withdrawals from your retirement account as the value of your assets drops. When values are low, you must sell more assets to raise the money you need. By withdrawing from a cash reserve instead, you can leave your invested assets where they are and allow them to grow as the market improves.
It's OK to check in with a professional
Even if you don't routinely work with a financial or retirement advisor, a bear market is a great time to work with an advisor who's also a fiduciary. A fiduciary is legally obligated to look out for your best financial interests, rather than lining their pocket by selling investments you don't need.
There's nothing like a cool, calm head to review your portfolio while other investors are panic-selling. Not only is a professional advisor keenly aware of market conditions, but they're often able to suggest ways to make the most of what's happening around you.
Plan to be flexible
The ability to zig when you'd planned to zag is a great skill during a bear market. For example, if you were planning to withdraw an extra $25,000 from your retirement account for an elaborate European tour, consider postponing that until the market improves.
The longest bear market in history lasted about two-and-a-half years, while the shortest was in 2020 and lasted only 33 days. The average length of a bear market is around 13 months, meaning you probably won't have to postpone any big plans for long.
Perhaps the most important thing to remember is that bear markets are a regular part of the economic cycle. They may not be fun, but they provide you with a chance to make the most of what you have.
