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Dave Ramsey's Smartvestor

What to Do During a Bear Market

June 12th, 2018 | 2 min. read

By Jacob Schroeder


BullMarket-imageRecent volcanic eruptions in Hawaii and Guatemala are a tragic reminder to those who live in the shadow of geological dangers that it’s not a matter of if, but a matter of when.

Similarly, after years of positive returns, it’s easy to forget as an investor that the stock market can go down. Historically, a market correction (a 10% decline) occurs about once a year and a bear market (a 20% decline) once every 3.5 years, according to Ned Davis Research.

So, it’s not a matter of if the market will fall, it’s a matter of when.

The good news is that the market has always recovered. Therefore, how much a bear market impacts you depends on your actions.

Here are three things to do that can help you weather a bear market and stay on the path toward building wealth.

1. Take a deep breath and remember three words

Whether you just started contributing to your 401(k) or already have $1 million invested for retirement, a large market drop never feels good. During a bear market, some people may even consider selling their investments out of fear of losing money.

That would be a mistake. If you sell at the wrong time, you could end up locking in your losses. Instead, take a deep breath and remember these three words: this is normal.

The market falls quite frequently. But most declines are forgotten because the market is rarely down for long. Consider that the average intra-year drop since 1980 has been 13.8%, according to the research by JP Morgan. Yet, annual market returns were positive in 29 of the last 38 years.

2. Reduce risk, as necessary

If you feel uneasy about a temporary decline in your portfolio’s value, then you may want to reduce the amount of risk in your portfolio. To have enough time to build wealth, you need a mix of investments that you’re comfortable sticking with for the long haul.

One way to reduce risk is to diversify. Portfolio diversification – holding investments that behave independently of the stock market – spreads your risk.

A mix of highly changeable investments like stocks with relatively steady investments like bonds generally makes for a smoother, consistent ride. It can help cushion the fall during market turbulence. Additionally, a portfolio made up of many asset classes can offer a better chance at participating in positive market returns when the stock market recovers.

3. Focus on the long term

Investing in a retirement account such as a 401(k) or IRA is meant to create wealth for the future. It’s not for day trading or trying to get rich quick. So, it’ important to focus on the long term in both good times and bad.

That’s why everyone should have a financial plan. It provides the steps needed to help accomplish your long-term financial goals. An HSBC report on retirement found that people with some kind of financial plan have more than three times as much in their nest egg than those with no plan at all.

If you have a plan in place, then stick with it. If you don’t, it’s time to get one.

Better yet, consider working with a financial adviser to put one together. An adviser can help you choose an investment strategy that is appropriate for your financial goals and tolerance for risk. In fact, the report above also found that those who have a financial plan and work with a financial adviser have an average savings that is 445% bigger than non-planners.