Financial markets have been on a rollercoaster ride for more than a year now. After a record year of performance in 2021, the S&P 500 Index officially entered bear market territory in June of 2022 and has been bouncing around aimlessly ever since. Meanwhile, recession fears continue to mount as investors grow increasingly concerned about the Fed’s ability to achieve a soft landing.
As a financial advisor, I know how difficult it can be to endure the ups and downs of the market. Yet I’ve also seen first-hand how panicking in the face of uncertainty can undo years of progress towards your financial goals.
When it comes to investing, no one knows what the future holds. And the truth is most things are outside of our control no matter which way the wind blows.
But one thing you can control is where you place your attention, and over the years I’ve found that focusing on opportunities rather than challenges makes it easier to weather the storm. So, in this article, I’m sharing four silver linings that may help you survive the current bear market and come out thriving.
Here are four silver linings that often appear during a bear market:
#1: High Quality Investments are “On Sale” in a Bear Market
No one likes to see their investment accounts decline in value. Yet one bear market silver lining is that investments you don’t yet hold (or would like to hold more of) often trade at a discount. That means long-term investors, including the professional asset managers who manage the mutual funds and ETFs you own in your portfolio, have an opportunity to upgrade portfolios at reduced prices.
Consider the technology sector, for example. For years, Big Tech companies like Facebook, Apple, Amazon, Netflix, and Google (the so-called FAANG stocks) dominated the U.S. stock market. If you owned these names, your portfolio likely performed very well—and vice versa.
Yet more recently, Big Tech companies have struggled to navigate persistent inflation, rising interest rates, and slowing economic growth. As a result, shares of these companies fell 30% in value in 2022 compared to 20% for the broad U.S. stock market. Thus, many money managers were able to purchase these stocks at a significant discount to where they previously traded.
Meanwhile, the bond market offers similar opportunities to upgrade your portfolio. Since bond prices and interest rates move in opposite directions, bonds tend to struggle in a rising rate environment.
In many cases, professional bond fund managers can purchase high-quality bonds at a discount and hold them until they mature at par, so you can earn higher interest payments in the interim. This can be especially advantageous for retirees who rely on their investment portfolios for income.
Of course, these are just two examples of the investment opportunities bear markets often create. However, these opportunities—no matter where they appear—can be a valuable silver lining.
#2: It Typically Creates Unique Tax Planning Opportunities
Another bear market silver lining is the unique tax planning opportunities it often creates.
For example, you likely know that selling an investment for more than what you paid for it results in what’s called a capital gain. In most cases, this gain is subject to your ordinary income tax rate or the capital gains tax (assuming you don’t hold the investment in a qualified account).
But when stock prices decline in value, you can harvest these losses to offset capital gains and reduce your year-end tax bill. You can also carry unused losses forward to future years, making this a useful strategy even in years you don’t have gains.
A Roth conversion is another tax planning opportunity that tends to be more compelling in a bear market.
The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. The amount you convert is taxable at your ordinary income tax rate. Thus, taking advantage of this strategy during a bear market (when your account values are likely depressed) can reduce your overall tax liability.
Once you convert to a Roth, any future withdrawals are tax-free, assuming you’re at least 59 ½ years old and meet the 5-year rule. Moreover, Roth IRAs have no required minimum distributions (RMDs). That means your funds can continue to grow tax-free throughout retirement until you need them.
#3: The Things You Can Control Still Matter
One thing I know to be true is that long-term investors can be financially successful no matter how the market behaves—if you focus on what you can control. And knowing there are things you can still control can be a major silver lining during a bear market.
Here are a few examples of things you can control:
- Savings rate
- Retirement plan contributions
- Asset allocation
- Risk management
Step Up Your Savings Rate If Possible
Unfortunately, a bear market and uncertain economic future can affect more than just your investments. Indeed, a downturn may mean layoffs, downsizing, and restructuring as companies revise their growth expectations.
Fortunately, you can lessen the impact of a financial setback by giving your emergency fund a boost. Having extra cash on hand can help you avoid going into debt or prematurely dipping into your retirement funds.
Most financial planners suggest saving enough cash to cover at least three to six months’ worth of living expenses. However, depending on your circumstances, you may want to save more than the rules of thumb suggest.
Automate Your Retirement Plan Contributions
A bear market can be scary, especially if you’re in or approaching retirement. As you watch your account balances fluctuate, you may feel the urge to pull back, stop investing, or even go to cash. However, attempting to time the market rarely produces better results than staying the course.
Instead, you can use a strategy called dollar-cost-averaging—that is, investing in your target portfolio routinely no matter how the market performs—to take advantage of a bear market. This approach tends to lower your average cost basis over time and can even boost returns over the long run—another silver lining!
Maintain Your Asset Allocation through Ongoing Risk Management
Asset allocation refers to the mix of investments you hold based on your financial goals and tolerance for risk. Studies show that asset allocation can be one of the biggest determinants of portfolio performance over time.
As asset classes perform differently, your portfolio can drift from its target asset allocation. Depending on how far it drifts, your portfolio may be too risky—or not risky enough—to achieve your goals.
Periodically rebalancing your portfolio to its target weights can help ensure you’re not taking on unnecessary risk in the event of a bear market. It can also help set your portfolio up for success when the market eventually recovers.
#4: Remember: This Too Shall Pass
Perhaps the most important bear market silver lining is that if history is a guide, it will eventually come to an end.
For context, the S&P 500 Index has had 26 bear markets since its inception, according to research from Hartford Funds. But there have also been 27 bull markets. Moreover, while stocks lose 36% on average in a bear market, they gain an average of 114% in a bull market.
In addition, bear markets tend to be short-lived compared to bull markets. According to Hartford’s research, the average length of a bear market is 289 days, compared to 991 days for the average bull market. Over the last 92 years of stock market history, bear markets have comprised only slightly more than 20 of those years.
In other words, throughout history, stocks have risen 78% of the time. Remembering that stocks tend to rise far more often than they fall and maintaining a long-term perspective can help you stay the course when markets falter.
You Don’t Have to Navigate a Bear Market Alone
If you tend to find the ups and downs of the market overwhelming and can’t seem to find any silver linings, consider working with a trusted financial advisor like Align Financial.
We can help you develop a long-term financial plan and investment strategy that helps you achieve your financial goals. In addition, we can proactively recommend strategies that keep you on the path to financial freedom no matter how the market performs.
To learn more about how we help our clients and see if we may be the right fit for your financial needs, please contact us. We’d love to hear from you.