Considerations As We Enter a Bear Market


The S&P 500 officially entered a Bear Market this week.  What is a Bear Market? It is when the stock market falls by 20% from its peak. The path of interest rates, inflation surprises, the war in Ukraine, and overall economic sentiment are causing uncertainty to run rampant in the market. 

When markets shift, particularly when they drop quickly, it’s natural to feel as though we need to “change” something, anything. It is extremely tempting to sell your investments and wait on the sidelines until the market calms. When times are tough in the market, we want to limit our losses. When things are going well, we wish we had invested more. We all fear missing out. However, statistics tell us, this is a losing strategy. When an average investor has this mindset, they tend to sell low and then subsequently buy high. How does this happen? By the time the markets feel comfortable enough to “get back in” the prices are usually much higher than where they were when we sold. Ultimately resulting in a lower rate of return, than if we had just stayed put.

So this begs the question, am I staying put for the sake of staying put or am I really where I should be? Let’s break this down in a way that will allow you to answer that question for yourself. If you are a client of Blue Rock Financial Group, our goal is always to work with you before there’s a market correction to ensure you are properly diversified to whether any storm. Let’s look at three separate categories. First, determine which category you fit into (understand, these are broad categories – and you may actually fit into more than one):

  1. Things to consider if you are still working or you don’t need to pull money from your investments to live:
    • For you, keep saving, times like this are usually when you have a rare opportunity to buy investments when they are on sale.  Historically the stock market goes up 7 of every 10 years. Consider this an opportunity.
    • Monitor expenses. Over the last few years, we may have had extra money to do things with. Now is not the time to buy things we don’t truly need, at potentially inflated prices.
    • Remain diversified. Where over the last few years we’ve seen unprecedented runs in many company stocks, it actually may have even seemed easy to make money. Today, it is far more difficult to pick a single winner during a bear market.
    • Finally, avoid taking large distributions because you can’t “handle” the downturn.  If you don’t need it, leave it alone. Timing the market simply doesn’t work. Markets are more likely to bottom before the actual economy shows any sign of turning around. In addition, timing the market requires being correct twice, when to get out and when to get back in. Some of the best market returns come in very close succession to the worst, and one only needs to look back to March of 2020 to see 8 of the 10 best single-day returns over the last 10 years occurred during this market environment. Focus on time in the market – not trying to time the market.
  2. What if you are already retired or taking regular distributions from your investment accounts:
    • It is likely, these gyrations in the market have the greatest impact on your emotions. The urge to do “something” is far greater because we are in the distribution phase. Understand, this is completely normal to feel this emotional tie to your money.
    • First, your mix of stocks, bonds, and short-term investments will determine your rate of return. However, does that impact your lifestyle? Your lifestyle is driven by how much money you need to live your life. If you are making distributions of $3k/mo and you have $1M or more, it’s likely you will be just fine. Understand your math.
    • This is a great time to re-evaluate your expenses. If you’re able to reduce distributions temporarily, the life of your portfolio will be extended. If you were working and your company ran into a few challenges, you would likely be more mindful of the future and plan for upcoming challenges. This is no different. You wouldn’t continue to spend at higher than necessary levels in the face of adversity.
    • Strategic distribution is another. When taking money from your portfolio, try to avoid distributing assets that are down the most. Consider distributing from a Stable Value account or from assets that are down the least. This will extend the longevity of your portfolio. As a Blue Rock client, we’re already doing this for you.
  3. What to consider if you have more cash than your emergency fund calls for?
    • We don’t know when things will start to turn positive again. However, some of the best times to buy stocks have been when things seemed the worst. Consistent investing gives you the discipline to feel good about entering the market when companies are on sale. One popular strategy that hasn’t gotten much press over the last few years is dollar-cost averaging. Dollar cost averaging is a way to systematically invest a set amount of money every month, regardless of price. In a declining market, your average cost will be lower than your single purchase
    • This also applies to your excess cash. Decide how much of your excess cash you are willing to invest and over the next 6 months, invest the same amount, each month at the same time for 6 months.  Again, this is dollar cost averaging, of the excess cash you’ve been holding.  Now is likely a very good time to put it to work.
    • Finally, if you have excess cash, be on the lookout over the next year for banks to start to pay higher rates on savings. Don’t keep more than you need because it feels good, but definitely be on the lookout.

While many investors feel they must do something during a market downturn, the key is being prepared before a downturn. History shows that the disciplined, patient investor will often be the one rewarded when markets return to their upward path. Keeping your emotions in check is crucial to long-term investing success.

Investors who have followed their emotions and join the crowd of other emotional investors, have historically regretted it. Periods that have followed investors selling out of the market have provided above-average returns, while periods that followed investors adding to the market have provided below-average returns.

Jeff Bezos once asked Warren Buffet: Your investment thesis is so simple, why don’t more people follow you? Buffet replied, because no one wants to get rich slow. Lean on this sound advice to follow the fundamentals and connect with your Blue Rock team if you have questions.