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.

How could the next president impact the stock market?

No matter who wins in November, we will have a different president on January 20th, 2025. This uncertainty can be scary, especially since the result feels, for the most part, out of your hands. We have two major political parties in the US and, most likely, the next president will be a Democrat or a Republican. Does the stock market perform better with either political party in the White House? Let’s take a look at the data.

As you can see, the stock market has performed pretty well no matter which political party holds the White House. George W. Bush didn’t have a great run, but investors who bought and held stocks during that time period are still experiencing good returns today. Outside of that one outlier, the stock market performs pretty well over time no matter which party is in office.

I don’t want to understate the importance of elections, but as far as stock market investors are concerned, history indicates that the election in November will have little impact on the performance of the stock market over the long-term. Still, markets can become volatile leading up to elections and even if you know on paper the president shouldn’t affect stock market returns, it can be tempting to make changes to your portfolio to reduce risk.

Should you change your portfolio before the election?

If you are really nervous about a certain candidate winning in November, making changes to your portfolio in advance of the election might seem like a good idea. Moving to safer assets such as cash or bonds could reduce the volatility in your portfolio. However, it is generally a bad idea to adjust your portfolio allocation for one short-term event. If your plan was actually good in the first place, it should continue to be good, carrying you through short-term volatility. Historically, the data shows that whoever wins in November does not have a strong impact on how the stock market will perform over that president’s term, so shifting your allocation because your preferred candidate may not win could lead to a significant loss of long-term returns, potentially changing your possible retirement date, withdrawal amount, or ability to achieve personal financial goals.

Don’t take my word for it – just look at the data. The following chart shows what missing just a handful of days in the stock market could cost you in the long-run. We have no idea when the best days in the market will occur, and they can often occur following periods of volatility. Removing your money from the market for any length of time could cost you big-time if you miss some periods of great returns.

Your long-term investing strategy should be appropriate for your risk tolerance and financial goals. There may be a bigger conversation to be had if your portfolio doesn’t match your tolerance for risk or personal financial goals, but shifting your allocation based on who may win the election in November could be a very bad idea. If nothing else, crunch your numbers, be honest about your financial goals, and do not take this decision lightly! 

Focus on what you can control

Nobody likes feeling like they don’t have control over events that could greatly impact their lives, personal or financial. There are always going to be events and people out of our control that affect our lives. The key to feeling better about what you can’t control is to focus on what you can control.

There is so much about your finances that you have control over. You may not be able to control the direction of the stock market (even the president has very little control over that), but you do have control over what you choose to spend money on, how much you invest for retirement, and your own financial goals.

If you feel like you don’t have control of your finances, our Financial Order of Operations is a great place for anyone to start. Whether you are maxing out all of your retirement accounts and wondering if you are on-track to retire or are still struggling with high-interest credit card debt, the Financial Order of Operations can help you develop a plan of attack for getting your finances under control. We hope this is the start, a roadmap, for getting a great financial plan in place that will help you weather the short-term storms with more confidence!

Here are the nine steps of the Financial Order of Operations:

1. Cover your insurance deductibles
2. Get your employer match
3. Pay off high-interest debt
4. Build a full emergency fund
5. Max-out your Roth IRA and HSA
6. Max-out your employer retirement plan
7. Hyper-accumulation
8. Pre-pay future expenses
9. Pay off low-interest debt

Have any questions about how these nine steps work and how to tell which step you are on? We created an ultimate guide to the Financial Order of Operations to help answer your questions. For those that want to take the FOO to the next level with video lessons, homework, private live streams, and access to our exclusive Facebook group, check out the Financial Order of Operations course.