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Investing Economy

How to tame the bear market

  • 5-min read

We’re going to need a barf bag if we’re expected to keep watching the financial markets this year.

Futuristic geometrical bull and bear facing off
Jackie Niam / Getty Images

The first half of 2022 has been a bumpy financial ride. Like, grab-a-barf-bag bumpy. Ongoing supply chain issues, inflation  at a 40-year high (how much did you spend on groceries today vs. a year ago?), a war in Ukraine, and a pandemic-related economic turmoil in China is not making things easier. 

Markets have been as volatile as an avocado’s ripeness… Several key indicators, including the Dow Jones Industrial Average and the S&P 500, have flirted with 20%+ declines over recent highs,and the NASDAQ has dipped further. When markets tumble 20%+, experts start talking about a bear market. 

When financial markets are down, you can take stock of your financial game plan. Let’s explore how. 

Are we entering a bear market in 2022?

We’re in it, baby. The S&P 500 officially entered bear-market territory in June 2022, after slipping more than 20% from January highs.

In the first half of 2022, both the Dow and the S&P indices dipped into bear market territory before making brief recoveries. Warning signs started flashing when Q1 earnings rolled out across industries—from tech giants to big-box retailers—and posted less-the-stellar financials. Inflation, which ran at 8.6% annually in May, is crimping consumer spending, which had been a driver during the Covid-19 pandemic and throughout last year, as consumers used their pent-up cash. Now, political and economic uncertainty is making investors anxious. You can see where this is going.

In an attempt to steady the economy, the Federal Reserve has committed to raising interest rates, which will make borrowing more expensive and could slow economy-wide spending. But, with markets down sharply in recent months, consumers are worried about their portfolios. And now that we’re in a bear marker, we want to know if a recession will soon follow. The Fed’s goal is to create a “smooth landing,” as Chair Jerome Powell puts it, where inflation cools without throwing the country into a recession.

The Fed raised rates by a half percentage point in May, the largest increase in 22 years to that point. Then in June, the Fed raised the federal funds rate by another 0.75 of a percentage point. And they’re not done: 

According to Fed data, the central bank is planning additional hikes in 2022, totalling 1.75%, with more on the way in 2023.

A brief history of bear markets

If you’re ready to tune me out (or find refuge in the RHOBH), let’s take a breath. Bear markets are a regular occurrence, and they don’t last forever. How long do bear markets last?

Since 1945, there have been 14 bear markets and, on average, they last about 9.5 months, according to The Washington Post.

The last official bear market was happening when you were just learning how to make bread. The S&P 500 fell into a bear market from February 19 to March 23, 2020 before recovering by August 2020. Before that, in 2009, the S&P 500 fell into a bear market territory for two months. However, in bear market history, other downturns have lasted longer than a year, including the ones in  2007 and 2000. 

So, are we in a bear market? Right now, it depends on the day. Even without the designation, it’s clear that market conditions are volatile, and this is a good time to revisit your investments and financial planning. 

5 things you can do with your money to prepare for a market downturn

One friend said it’s a good idea to buy in a down market. Your coworker said you should sell, sell, sell. Who’s right? Maybe neither of them. A bear market creates some investment opportunities, but it depends on your financial situation, long-term plans, and your stomach for a market rollercoaster…

Buy bonds

When the stock markets are roiling, many investors look for safe places to stop the bleeding. Bonds, including U.S. Treasury notes and municipal bonds, are considered secure and stable. While they don’t pay big proceeds, you also aren’t losing anything.

Bond yields tend to rise as the Fed raises interest rates, but they’ve been pretty shaky this time around.

And, special for this maybe-bear market, don’t forget about inflation-linked bonds. 👀

Invest consistently

If you’re willing and able to invest money in a turbulent stock market, you can deploy a dollar-cost strategy,.where you take a total dollar amount and invest it in chunks over time, like three, six, or 18 months.  In theory, you’ll buy as the market moves, and, eventually, your gains will offset or exceed your losses. This is a good play for an investor who doesn’t immediately need the money and can be patient. As market conditions improve, hopefully your balance sheet will too.  

Buy strategically 

Even in tough economic times, there are some dependable stocks, and one investment strategy is to buy these so-called defensive stocks. These are usually solid performers because they provide in-demand products and services. Defensive stocks could be consumer packaged goods, healthcare, utilities and automotive companies. (People always need toilet paper and electricity, right?) 

Look for a dividend

If you need to see some green ASAP of you’ll pass out, look for stocks that regularly pay a dividend. Even if the stock prices fluctuate, you’ll still receive a distribution with a stock known for its dividends. (And if they don’t declare one, you know they’re in big trouble.).  

Diversify your portfolio

Remember how your parents told you to eat your meat, vegetables, and potatoes? Financial advisers have a version of that. They encourage consumers to develop a well balanced financial portfolio, and that means a mix of stocks, bonds, cash, and other investments. If you’re weighed too heavily in one sector, you’re more vulnerable to the market and changing interest rates (tech investors know this now). If you have enough diversity, you aren’t as exposed and better able to ride out the turmoil without big losses—and major stress. 

Do nothing

This isn’t the sexiest strategy, but it is one that many people choose. When the market is upside down, rather than make any big moves, just be patient. You might be upset with your 401(k) or stock portfolio today, but it will change tomorrow and the next day. While no one can read the tea leaves, what goes down usually comes back up, and the stock market follows that pattern. Sometimes doing nothing is doing something.

Prepare to fight the bear

Depending on your financial situation, a bear market can present some investment opportunities. But if you don’t have an appetite for white-knuckling the stock market, a bear market is a chance to take stock of your finances. That way, when the market recovers, you’ll be in a position to make changes—or maybe just sit tight.