Some ways to deal with a bear market
We’re in bear market territory again, only two years after the coronavirus bear that lasted just over a month (Feb. 19, 2020, to March 23, 2020).
The Dow fell below 30,000 on Thursday, June 16, after reaching an all-time high of 36,799 just five months earlier on Jan. 4, 2022. The S&P 500 Index is down 23% year to date. The Nasdaq is down 32%. This bear is different. Inflation is soaring (8.6% year over year in May). The Federal Reserve is reacting by raising its key federal funds interest rate quite aggressively — including a 0.75 percentage point increase on Wednesday, June 15 — with more increases on their way.
If the Fed wanted to get investors to pay attention, they succeeded. These are uncertain times ... for many reasons.
That leaves us with this question: Should investors react?
I’m sure you’ll agree that the answers will depend on circumstances. Traders will be in and out of the market; they can take advantage of increased volatility, including the downside, assuming they know how to sell short or buy inverse ETFs (exchange-traded funds) that make money during market declines. (Note that inverse
ETFs and going short are both advanced strategies that may be appropriate for seasoned investors in special cases but are definitely not for everyone. (Read “FINRA, SEC Warn Retail Investors About Investing in Leveraged or Inverse ETFs” at tinyurl.com/2p92rh6d and “The Lowdown on Leveraged and Inverse Exchange-Traded Products” at tinyurl.com/4j3e99fk.)
What about long-term investors? That depends on the horizon. Young 401(k) plan participants have 30 or 40 years ahead of them. Their payroll deductions are buying shares of their 401(k) stock funds at much lower prices than just six months ago.
Also consider this: Regardless of your horizon, if your company pays matching contributions into your 401(k), you’re ahead no matter what. If your match is $100 and your contribution is $100, you have $200 invested. You would have to lose more than $100 in a market decline before you have a “loss” on your own investment of $100.
Who should worry? Retirees who don’t have a handle on cash flow. By cash flow, I mean the dollars you need to pull out of your investments to pay for living expenses.
A retiree with a 20- to 30-year horizon needs to focus on how the cash is generated. If the cash is generated by interest and dividends, then a market decline will reduce the dollar value of the holdings, but not the cash flow.
On the other hand, if investments are not producing income, then cash flow is generated by selling holdings. Retirees who are selling investments to pay for expenses are at risk of running out of money in a protracted down market.
The best advice is to do your cash flow analysis, understand where your cash will be drawn from (income or capital) and structure your portfolio to prepare for down markets AND rising inflation — all doable, if you are willing to do some homework.
What’s the bottom line? Markets ebb and flow. It’s always wise to keep that in mind, especially if you want to retire someday.
For helpful tools, go to FINRA’s Personal Finance website, (tinyurl.com/2ayx5f74). Visit your library for one of my retirement books: “The Retirement Survival Guide”; “Managing Retirement Wealth”; “Retire Securely”; or my newest book for lawyers, “The Discerning Investor.”
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2021 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.