1. Don’t try to time the market

Timing an investment into a declining market is like trying to catch a falling knife. Instead of attempting to time the market bottom, invest regularly and consistently while the stock market is declining. If the market is extremely volatile, it may make sense to invest more frequently in the market; if you normally make contributions once per month, for example, you could consider making weekly contributions in periods of extreme volatility.

Historically, the more money you can invest in the stock market while it is down, the better. If you are able to accelerate contributions, it may be worth considering; nobody knows exactly how far the market will fall or when it will turn around, so it’s important to make regular contributions instead of contributing everything into the market at once. Trying to time the bottom could work out well, but what if the market drops another 30% after you make a lump sum investment? Spreading your investments over a period of time, known as dollar cost averaging, can reduce the impact of stock market volatility on your portfolio.

Stock market declines (and bear markets) often coincide with other negative economic events, like increased unemployment. If you don’t currently have a full emergency fund, now is a great time to start building one. 

2. Harvest losses in taxable accounts

A positive to stock markets being down is the opportunity to harvest losses where appropriate. Harvesting losses is only beneficial in taxable accounts; investments in tax-advantaged accounts like Roth IRAs and 401(k)s are not subject to capital gains tax, so there is no benefit to harvesting losses. In taxable investment accounts, though, harvesting losses can save you money on taxes.

Here’s how it works: by selling a security at a loss, you “lock-in” that loss and can report the loss on your taxes and deduct the loss against future gains/income. It is very important to be aware of wash sale rules. If you reinvest in the same or a substantially similar security within 30 calendar days before or after the sale, you won’t be able to use the loss against gains or income.

3. Reevaluate your investing strategy

It may not be wise to make major changes to your investment strategy solely because of a market downturn, but it’s as good of a time as any to reevaluate your investing strategy. If it feels like your portfolio shouldn’t be down as much as it is down, compare it to a target date index fund close to the year you’d like to retire. If the target date index fund is down, say, 10%, but your portfolio is down 50%, you may need to reevaluate how much risk you are taking in your portfolio.

Diversification doesn’t feel important until it is. When certain sectors of the market are outperforming, it can feel like diversification is holding you back. When certain sectors of the market are dropping much more than others, though, diversification helps ensure your portfolio doesn’t take the brunt of the losses by being invested in a wide array of assets.

4. Focus on how much you are investing rather than your investment returns

It’s really fun to check your investments when the market is going up, but not so fun when the market is declining. If you are contributing to your portfolio every month and it is still dropping in value overall, it probably doesn’t feel like your contributions are making any difference. When the market is dropping, try focusing on how much you have invested into the market and how much you own instead of the value of your investments. You don’t control the direction of the stock market, but you do control how much you contribute and how many shares you own.

A little over a week ago, the CNN Fear and Greed index was at 3 – that’s 3 out of 100, not 3 out of 10, which is about as far into “extreme fear” territory that we can get. Stock market declines are scary and fear-inducing, even for seasoned investors. Instead of focusing on what you can’t control during a market decline, do your best to stay focused on actions you can take. Don’t try to time the market bottom, use the decline as an opportunity to harvest losses in taxable accounts, reevaluate your investment strategy (but don’t make major changes unless they are warranted), and instead of checking how much your accounts are up or down, look at how many shares you own and how much money you have contributed to your accounts.

It’s an uncertain time to be an investor. The S&P 500 Volatility Index, another measure of uncertainty in the market, has reached highs last seen amidst high inflation and concern about rising interest rates in 2022. Before that, the last time the volatility index was this high was during the pandemic and uncertainty around Covid outbreaks. I mention these events because they all have something in common, as with every market dip: this time feels different.

Is this time different?

I remember when the stock market was crashing during the pandemic. I don’t normally like to use the word “crash,” as it often feels like hyperbole, but the spring of 2020 absolutely was a crash. The stock market dropped so quickly that trading had to be halted multiple times. One of the lengthiest Wikipedia articles I’ve read, at nearly 10,000 words and over 500 sources, is simply titled “2020 stock market crash.” I remember feeling extreme uncertainty about the future of the stock market, and even though I knew the market had experienced similar declines before, some much worse, there’s always a nagging question in the back of your mind: is this time different?

It’s yet to be seen whether the bull market will change to bear market or whether we will experience a recession in 2025 – both of those could very well be avoided. This could be a small blip on the radar that we won’t even remember a year from now. Or it could be the beginning of a larger selloff; there’s simply no way to tell for certain. If history can predict one thing about the future, though, it’s that this time will not be different. It may feel and look different, like all corrections do, but the stock market always recovers, and usually very quickly.

How to prepare for a bear market

I don’t want to say that you should never make changes to your investment portfolio in reaction to market declines because that simply isn’t true. The recent market selloff might help you realize that you are further out on the risk spectrum than you should be, and you need to dial it back a bit. However, any changes to your portfolio should be made based on numbers and evidence rather than emotion. Sure the stock market might feel scary now, but will a bear market in 2025 significantly impact your retirement plan? If you are retired and invested 100% in the S&P 500, the answer to that question would be yes and you likely would need to make changes to your investments. But if you have a risk-appropriate mixture of stocks and bonds in your portfolio, the answer to that question is likely no.

Personally, I have never met anyone that wishes they would have sold all of their investments and gone to cash right before a steep market decline. “We wish we would’ve sold everything in 2008” or “I can’t believe we didn’t sell everything right before the pandemic”  just aren’t sentiments you often hear. What I do hear are regrets about making portfolio changes. The fear and emotion of a market decline can cause a strong reaction, and sometimes that reaction is to make a large change to your portfolio that you will regret later down the road.

I don’t want you to take my word for it. Here’s what the data says about what happens after a bear market.

The evidence and numbers

When it feels like the worst time ever to be invested in the stock market, chances are it could be the best possible time to be an investor. I know that sounds like an oxymoron, but it’s true: the stock market often experiences some of its best returns when things feel hopeless. Is there anything more hopeless than hitting the absolute bottom of a bear market? To jog your memory, this feels like March of 2020 in the middle of the pandemic, or like March of 2009 in the middle of the housing crisis. 

Here’s how the stock market performs once it hits that bottom. The average return in just one month is nearly 15%! One year after hitting the bottom of a bear market, the S&P 500 is up, on average, 43.51%. Stock market recoveries tend to happen very quickly once the market bottoms out, which is why any changes made to your investment strategy can potentially be harmful. 

The S&P 500 experiences strong returns once hitting the bottom of a bear market, but the same is true of entering a bear market. The chart below shows S&P 500 average returns from the day it enters bear market territory. In many cases, the S&P 500 still has quite a ways to fall before rebounding. However, the average returns are still very strong. Whenever we enter a bear market, you can expect, on average, the S&P 500 to gain 14% over the next year. If you like to think longer-term, you can expect the S&P 500 to gain 122%, on average, over the next 10 years.

Experiencing stock market volatility isn’t fun. Usually your retirement depends on the performance of the stock market, to a certain degree, and the thought of your retirement being in jeopardy is very scary. While every event that causes a bear market looks really different, recoveries often look similar. They tend to happen quickly and stock market performance after hitting the bottom, and after entering bear market territory, is exceptional. It might not be wise to make big changes to your investment portfolio driven purely by emotion and fear, but it is always worth evaluating whether the level of risk in your portfolio accurately reflects your risk capacity and retirement goals. If you think it’s time to take the relationship to the next level and meet with a professional, visit our Work With Us page.

Inflation has cooled to 3%, according to the latest data, but the Federal Reserve is expected to keep raising interest rates. With that and student loan payments restarting, could that throw the economy into a recession? Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.

Why you should be optimistic about the future

We are often asked about worst-case stock market scenarios. What if the stock market doesn’t make any money for the next decade? What if we experience another Great Depression? We know that the S&P 500 has annualized nearly 12% per year since 1950, but if you aren’t a natural optimist, it can be hard to imagine the next 10, 20, or 30 years will be just as good.

Part of this pessimism about the future comes from a survivorship bias. We don’t think past events, economic or political, were that bad because we made it through to the other side. Imagine the Cold War when nuclear attacks on U.S. soil were a very real possibility and children participated in “duck-and-cover” drills in school. The 1970s and 1980s were a very scary time economically with the oil crisis and out-of-control inflation. Although I was in grade school, I still remember the day of September 11th, 2001 extremely vividly. I’m not sure many were optimistic about the future in the days following the attacks. Even more recently, we experienced a global pandemic. I remember how afraid we all were in those weeks and months in the spring of 2020 because we just didn’t know what to expect.

The future seems scary because of the unknowns. We don’t know what hardships we will experience in the future, so how great (or terrible) the future will be is limited only by the bounds of your imagination. We don’t know what the next 10 years, 20 years, or 30 years will look like. But we do know we’ve experienced difficult times in the past and we will experience hard times in the future. The progress of humans and the United States has not only not been slowed, it has accelerated. There is great reason for optimism about the future, with the accelerating rate of technological innovation in almost every sector of our lives and the economy being near the top of the list.

What if I invest during a “lost decade”?

So what if there’s reason to be optimistic about the future of our world and the economy? That doesn’t mean we will never experience another Great Depression, or a “lost decade” of stock investing. Here’s exactly how you can make money even when markets are flat: by investing consistently through good times and bad.

The following case study, using data from Fidelity, shows the power of dollar cost averaging during the 25-year period following the Great Depression.

The Dow was flat for 25 years. That sounds like a horrible time to be an investor! But if you were consistently investing in the market every year, you would have actually made nearly 12% per year – even though overall, the market made nothing from the beginning of the period to the end of the period.

For a much more recent example, check out the chart below showing the S&P 500 from October 9th, 2007 to April 22nd, 2013.

The market was flat for five and a half years. If you started investing in 2007 and saw the market at the same level it was at in 2013, you would probably be tempted to give up entirely and put your money in a savings account.

If you invested consistently during this period, though, you would have made money even though the market did not. Someone investing $500 per month during this time would invest a total of $33,000 over five and a half years. On April 22nd, 2013, even though the S&P 500 was down from where it was when they first started investing, their total $33,000 invested would be worth $46,327. That works out to an annualized return of 11.9% over those five and a half years. (All numbers calculated using YCharts S&P 500 Total Return (SPXTR)).

Fast forward to today, and that $46,327 is now worth $144,225 (without contributing another dime). The return over the last nine years from April of 2013 to today is 211% total or 13.5% annualized.

Down markets benefit savers

Talk of a “lost decade” or a looming recession are scary because the future is unknown. Looking back at history, though, we can see that consistent investors made money even during the period of time following the Great Depression and in the years after the Great Recession of 2008. A period of time where the market is “flat” will never be completely flat – the chart I used earlier is anything but flat – and all these dips and valleys allow investors to make money in periods where the market may not (at least when measured from start to finish).

While checking your accounts may not be fun when the market is down, dollars invested are extremely powerful. It’s possible to make money when markets are “flat,” even over longer periods of time lasting years or decades. The best thing you can do during periods of market volatility is focus on your savings rate instead of being overly concerned with day-to-day fluctuations in the market.

If you’ve been paying attention to financial markets at all this year, you know the stock market has not been doing great. The chart below shows the S&P 500 year-to-date, which is down a little over 20%.

After a bear market rally from June to August of just over 17%, the market has since been on a steady decline, driven partially, if not mainly, by persistently high inflation and a commitment by the Federal Reserve to raise interest rates until inflation comes down. Jerome Powell has said “we must keep at it until the job is done.”

Unlike the brief downturns at the end of 2018 and March of 2020, this bear market is more prolonged (the decline began in January) and has many wondering what they should be investing in, or if they should be investing at all right now. Although this downturn is unlike the downturns in 2018 and 2020, we are not in uncharted territory.

In the last 70 years, the S&P 500 has dropped by 20% or greater on 11 separate occasions, and over those 70 years, 46.3% of trading days have seen the S&P 500 decline. We are currently experiencing about a once every seven years event, but we experience market declines nearly every other day.

We are currently experiencing the longest bear market since 2008. Many investors today were teenagers or young adults in 2008 and weren’t investing. The current downturn feels bad because it happens so infrequently; this is a normal but only occasional occurrence, which is a great reason for optimism.

Our friend Jeremy from Personal Finance Club recently posted the graphic below on Instagram. I think it’s a great visual reminder of how the market works: we experience a lot of UP, a short DOWN, and then back to more UP. The periods of DOWN vary in length, but over longer periods of time, there has always been significantly more good times than bad (which you can see visually by the amount of green or the direction of the line in the chart).

If we know that markets go up much more often than they go down, and that downturns are a normal but infrequent part of investing, how does that impact where you should put your money?

Where should I put my money?

We believe there is a tried-and-true nine step process you can follow to know where you should put your next dollar (cue Brian holding up the FOO deliverable).

For those in the earlier steps of the Financial Order of Operations, listed below, current market conditions may not impact the plan for your dollars.

1. Deductibles Covered

Covering your highest insurance deductible is essential to keeping your financial life out of the ditch if something were to go wrong. This is why it is the first step of the FOO and one that can not be ignored.

2. Employer Match

The free money that your employer offers through your retirement plan is a priority no matter what the market is doing. The 100% or even 50% rate of return is more powerful than even high-interest debt.

3. High-Interest Debt

Speaking of high-interest debt, paying down any you may have might feel especially good when the market is down. The average interest rate on credit cards is currently 18.16%, which means Americans paying down credit card debt right now can expect an average return of 18.16%, no matter what the market does.

4. Emergency Reserves

Your emergency reserves are an expansion of the deductibles you covered in step one. Needless to say, building a full emergency fund is a priority especially when the market is down because you may also experience a greater likelihood of losing your job.

Those in later steps of the Financial Order of Operations may have additional actions they can take during market downturns. Let’s take a look!

5. Roth IRA & HSA

Contributing to your Roth IRA and HSA remains a priority even when markets are down. In fact, these can be some of the most powerful dollars you will ever invest. Take a look at market returns after hitting the bottom of a bear market.

Not only are down markets a great time to stay the course, there are also opportunities to convert pre-tax dollars to Roth while the market is down. Check out our upcoming show, “The Market Is Crashing (Where Should I Put Money Now?)” for a full case study on converting assets when the market is down.

6. Max-Out Retirement Accounts and 7. Hyper-Accumulation

The above chart showing returns after a market bottom applies to everyone investing, not just those contributing to their Roth IRA or HSA. How do you know which account to contribute to, though? In this past article of FYI by FTE, I broke down when to consider contributing to Roth vs. pre-tax. Generally, if your combined marginal tax rate is under 25%, you may want to contribute to Roth; over 30%, pre-tax; and in-between is a gray area. The article “Should I Contribute to Roth Accounts?” has several more factors that should also be taken into consideration.

Tax-advantaged retirement accounts typically take priority over taxable accounts, but that doesn’t mean taxable accounts should be ignored altogether. They offer you valuable flexibility in retirement as they have no age restrictions on access and come with additional tax diversity.

8. Prepaid Future Expenses and 9. Low-Interest Debt

The current market downturn doesn’t really impact saving for future expenses, but it could impact your plan to pay off your low-interest debt. As Brian recently mentioned on the show, he is slowing down a bit on pre-paying his low-interest mortgage in this down market. It could be worth not prioritizing low-interest debt early when the market is so attractive, especially if you are under age 45.

What should I invest in?

Should the current market conditions cause you to completely rethink your investment strategy? Although tweaks here and there may be helpful, overall, your investment strategy should be good before a downturn, during a downturn, and after a downturn. Index funds consistently outperform actively managed funds, with about 90% or more of passive funds outperforming active funds over longer periods of time. For younger investors, low-cost index funds and target date index funds are worth considering in your investment allocation. If you’ve reached the point where a more personalized portfolio makes sense, and feel like your portfolio can be more optimized to your specific situation, don’t be afraid to reach out to a professional.

Nobody likes when the market is down, especially when it’s down for multiple months. Bear markets are a normal but fortunately uncommon part of the investing journey. It can be tempting to try something new when it feels like investing isn’t working like it used to, but staying the course is most often the right decision.

In this episode, you’ll learn:

• The most common financial mistakes we see people make during a recession
• How to win financially during a recession
• Everything you need to know to stay on track financially

Research and resources from this episode:

• Work with us

Enjoy the Show?

• Sign up for the Financial Order of Operation (FOO) Online Course!
• Sign up for our Know Your Number Course!
• Check out our Net Worth Tool!
• Get FREE downloads full of financial advice from our Resource Page!
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If you have any questions (or just want to say hi!), join the conversation on Facebook, Twitter, Instagram, or Tik Tok!

College costs in America have skyrocketed over the last few decades, as has the total student loan debt in the country. In this episode, we’ll talk about why college in America is broken, what went wrong, and how you can do college the right way.

In this episode, you’ll learn:

• Why college has become less affordable
• How this affects the average American
• What you need to know before your kid goes to college
• The best ways to save for college
• Practical guidance on how to not fall into common student loan debt traps
• Creative ways to pay for college

Research and resources from this episode:

• A Look at the Shocking Student Loan Debt Statistics for 2022
• Trends in College Pricing and Student Aid 2021
• College students expect to make $103,880 after graduation – almost twice the reality
• Agglomeration and Job Matching among College Graduates
• College is more expensive than it’s ever been, and the 5 reasons why suggest it’s only going to get worse
• The Bennett Hypothesis Confirmed – Again
• Financial Aid Statistics
• Education Statistics
• Historic Endowment Study Data
• The Top 529 Education Savings Plans of 2021
• 529 Plan Tax Benefits
• What is the Financial Value of my Degree?
• Planning to open a 529 for a grandchild
• Work with us

Enjoy the Show?

• Sign up for the Financial Order of Operation (FOO) Online Course!
• Check out our Net Worth Tool!
• Get FREE downloads full of financial advice from our Resource Page!
• Subscribe on YouTube or wherever you listen to podcasts.
• Send us your questions or share your story.

If you have any questions (or just want to say hi!), join the conversation on Facebook, Twitter, Instagram, or Tik Tok!

Every recession is different, and this one is no exception: we are currently experiencing once-in-a-lifetime inflation and started the recession with historically low interest rates. Will this recession be different from any other we’ve experienced? How will it end and what do you need to do to prepare?

In this episode, you’ll learn:

• How to navigate inflation
• What you should focus on during a recession
• How this recession is different

Research and resources from this episode:

• Janet Yellen responds to Cardi B: “There’s nothing to suggest that a recession is in the works”
• Great Recession Survivors, Pt. 2
• Boat Sales Start to Recover, but Bargains Remain
• FRED Economic Data
• Sales of vacation homes fall during recession
• Companies that announced Major Layoffs and Hiring Freezes
• Work with us

Enjoy the Show?

• Sign up for the Financial Order of Operation (FOO) Online Course!
• Check out our Net Worth Tool!
• Get FREE downloads full of financial advice from our Resource Page!
• Subscribe on YouTube or wherever you listen to podcasts.
• Send us your questions or share your story.

If you have any questions (or just want to say hi!), join the conversation on Facebook, Twitter, Instagram, or Tik Tok!