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It’s a Bear Market – What Should I Do?

March 17, 2020

Yep.  We’re officially in a “bear market” and you are wondering what you should do next.  In most cases, the answer is nothing at all.  A bear market, defined as a decline of more than 20% from its previous high, occurs with some regularity and has occurred approximately once in every five years since WWII.    

To add a bit of perspective, many investors will remember the Arab Oil Embargo in 1974 that resulted in the S&P 500 falling some 43%.  In 1987, stocks fell 23% in one day on Black Monday (September 30, 1987), and as recently as 2008 the sub-prime mortgage crisis resulted in the S&P 500 losing some 46% of its value.  The stock market eventually recovered in each of these cases and went on to new highs. 

As an investor, it is sometimes difficult to maintain a long-term market perspective during times of extreme market volatility.  In recent days, the increase in volatility in the stock market has resulted in renewed anxiety for many investors.  While it may be difficult to remain calm during a substantial market decline as we are currently experiencing, it is important to remember that reacting emotionally to volatile markets may be more detrimental to portfolio performance than the market decline itself.

While investors are counseled to remain “in their seats” during times of significant market downturns, that is not to say that there are not some things that investors might want to consider.  Those considerations may include:

  • Rebalancing Your Portfolio - Rebalancing back to your individual investment targets is generally a prudent thing for investors to do.  Rebalancing can be done immediately or over time and can be a subject for discussion.  We are reminded that targets are established to help remove emotions based on fear or greed and provide discipline as to how and when to buy or sell assets. 
  • Tax Loss Harvesting – Investors that have taxable accounts may find it advantageous to sell investments with significant losses and purchase other investments with similar characteristics.  In doing so, tax law allows the investor to offset capital gains, and any unused losses can carry forward on their tax return to offset future capital gains as well as to offset up to $3,000 in ordinary income each year. 
  • Roth Conversions – From a tax perspective, it may be beneficial to make Roth Conversions during a market downturn.  By converting assets when stock prices are low, investors will have a lower resulting tax bill due and also benefit from tax free growth in the future.  This may appeal to some investors, particularly for those who desire to pass along their assets to beneficiaries.  We also note that this may be more important now that the SECURE ACT requires that beneficiaries beyond a spouse must fully distribute IRA/401k assets over a 10-year period. 
  • IRA Contributions – If you have not made 2019 or 2020 IRA contributions, it may be a good time to do so while stock values are low. 
  • Invest Extra Cash – If you have extra cash on the sidelines, it may be time to consider putting it to work while stocks are at discounted market prices.  However, this should be carefully weighed against any possible short-term or future cash needs.
  • Reassess Your Risk Tolerance – With the current market circumstances, most investors can take consolation in the fact that they have portfolios which take into consideration their risk tolerance.  This of course may mean different things to different investors.  In general terms, most investors feel comfortable with an allocation that reserves a certain percentage of their portfolio for living expenses in cash and bonds.  This amount can vary from one investor to another but often equates to that amount being equal to or greater than 3 to 7 years in cash/bond reserves.  A discussion with your advisor is recommended if you are not comfortable with the amount that you have in cash/bond reserves for living expenses. 
  • Home Refinancing – With interest rates at extremely low levels, refinancing may be a planning strategy and an opportunity for homeowners.  If you currently have a higher interest rate loan, it may be cost effective to refinance and in doing so improve monthly cash flows.  Increased cash flows can be used to bolster savings or fund living expenses, and this may help to reduce portfolio withdrawals at a time when stock prices are low.    

Last but not least, the circumstances surrounding this bear market are uniquely related to a world health crisis.  Throughout history, the world has suffered other global crises that were also unique and have rattled markets.  We, nor anyone else, can predict when this current crisis and bear market will end. However, we do believe that this most recent world crisis will eventually end and market stability will return.  In the meantime, “staying in your seat” along with those considerations previously discussed here may be the best advice given at this time. 

As always, we at Portfolio Advisors are here to serve and assist you and your family as you deal with any personal or life challenges you may face related to this current crisis.  In the short term, we are encouraging alternatives to face to face meetings.  Please stay safe and feel free to contact our office at any time with questions or concerns. 


The Portfolio Advisors Team

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