Investing

Are You Financially Prepared for a Bear Market?

Calculator beside budget with pen

2017 was a great year for the stock market. The S&P 500 ended up +19.4%, which is extraordinary by any standards. When things are good, it’s easy (and tempting) to forget that things will be bad again at some point in the future. But they will. If you don’t believe me, Mr. Money Mustache wrote an article called “Great News: There’s Another Recession Coming” which lays it out better than I ever could.

The generally accepted definition of a bear market is one in which prices fall 20% or more from their highest point over the previous 52 weeks. This happens to individual stocks frequently, but when it happens to a major indice, like the S&P 500 or the Dow Jones Industrial Average, it reflects a wider trend. The good news is that we, as employees, investors, and spenders can minimize the impact a bear market will have on our lives. Here are some best practices you can implement today.

Have enough cash on hand

If you Google how much cash you should have available, the standard answer seems to be a minimum of six months worth of expenses. If you live off $500 a week, that means you should save at least $13,000. That’s in addition to whatever you have in investments, because $13,000 before a bear market likely won’t be $13,000 in the middle of a bear market. This emergency fund is not only for use in a recession. It could come in handy in the case of unexpected medical bills, job loss, or family emergencies. If you don’t have an emergency fund already set up, start one today.

Create frugal spending habits now

In a recession, even those who don’t see a reduction in salary tend to tighten their belts a little. Maybe they don’t take a vacation, or put off buying a car for a year. You’ll find it easier to make sacrifices if you’ve already become accustomed to spending frugally. In addition, it helps to have fewer financial commitments. Now’s the time to try and negotiate a lower rent payment, shop around for cheaper car insurance, and cancel that subscription you never use.

Make yourself indispensable at work

Graph of civilian unemployment rate, seasonally adjusted
U.S. Bureau of Labor Statistics, Civilian Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, January 1, 2018.
The above graph shows the civilian unemployment rate, adjusted for seasonality, since 1948. As you can see, it varies pretty widely, dipping below 3% in the 1950s and reaching almost 11% in the 1980s. Nobody is safe – not the recent college grad, and not the executive with 40 years of experience. No matter what you do, you may still find yourself laid off in a recession, but that shouldn’t stop you from trying. Try to make yourself indispensable at work by volunteering for special projects, becoming a subject matter expert, or taking on leadership responsibilities. If it doesn’t help you keep your job, it’ll make you more marketable as you search for a new one.

Earn income from multiple sources

It won’t hurt quite so much to lose your primary income stream if you have a backup source, even if that source is small. If you currently have one job, ask yourself what else you could do. I’m not saying you should go out and get a second full-time job, but I think it’s worth considering your skillset. Could you rent out a room in your home, sell craft projects on Etsy, prepare tax returns, or teach English online? Exploring your options now will make you more prepared if you need to start a side hustle, or turn a side hustle into a full-time job, in a bear market.

Diversify your investment portfolioAre You Financially Prepared for the Next Recession?

Diversifying your investments is something you should be doing anyways, but you’ll really see the benefit in a bear market. Do you have fixed income and equity? Real estate and commodities? U.S. and international? Small cap and large? When’s the last time you rebalanced? If you haven’t looked at your investment portfolio recently, do it now. It will likely decline in a bear market no matter what you do, but as long as you have a good long-term strategy in place, there’ll be no need to panic.

Perform regular maintenance on your physical assets

Houses, cars and even bikes can be crucial assets in a bear market. You could sell them, or use them to generate some side income. You might rent out a room or your entire house. Perhaps you could drive for a shared-ride service. Then again, you might continue to use them exactly as you do today. Whatever the case may be, it will help if you’ve kept them in tip-top shape so that you don’t have to fork out a lot of money for routine maintenance in a time that is already financially stressful.

Pay off debt

Recessions are stressful enough without having to worry about where your next credit card or student loan payment is coming from. If you have consumer or student loan debt, try to pay it off while the going’s good. It’ll be one less concern in a bear market. Even if the next recession is years away, paying off debt can feel like a weight off your shoulders, and it will give you more time and energy to focus on what matters most to you.

Expand your network

I graduated from college in the fall of 2008, right in the middle of the Great Recession. I also got my degree in a field that is notorious for, “It’s not what you know, it’s who you know.” I knew no-one. Needless, to say, I couldn’t find a job. It was hands down the hardest year of my life, and knowing what I know now, I’d do things a lot differently if I got a do-over. One of the key takeaways for me was that contacts are crucial in a bear market. When there are few jobs available, it pays to have a connection on the inside. Work on expanding your network now, both within your company and externally. Even if you don’t need them come the next bear market, they’ll likely come in handy at some other point down the line.

Which of the above strategies do you already have in place? Have you taken any other steps to prepare for a bear market?

4 thoughts on “Are You Financially Prepared for a Bear Market?

  1. I am wondering if the markets and the economy can keep it up in 2018. It seems like the best course is to follow your advice and start preparing for a bear market…it’s got to hit sometime! Developing other income sources and diversifying investments are my main goals for this year, so that I’m ready for anything. 🙂 Happy New Year!

  2. I’m hoping it comes within the next three years so I can buy a bunch of stocks when they are on sale before quitting my job. It’s gonna come, may as well make the best of it 🙂

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