Six Tips Accumulators and Long-term Investors Should Consider During Bear Markets

These past two years have been an investor's dream, and everybody wanted in for it. The number of retail investors increased significantly in 2020. One estimate showed that individual investors opened more that 10 million brokerage accounts. The influx is due to increased accessibility to retail investing through online brokerages, making self-directed investing much simpler. Additionally, government stimulus, a work-from-home revolution, and reduced spending provided the resources for people to venture into investing.  

However, all good things do come to an end or at least a slowdown. And while it’s temporary, it's not pleasant to watch your wealth decline by 20 to 30% (depending on how you were invested). For some, this is a wake-up call. The market does not continuously experience exceptional growth like in 2020 and 2021, and if you’re a lifelong investor, you will enjoy market pullbacks, bear markets, and recessions more than once in your lifetime. History has demonstrated this. However, if you are in the accumulation phase and/or a long-term investor this is an opportunity for you. With the right mindset, steadfast behavior, and commitment to the investing process you will build and maintain wealth.  

Here are tips to consider in this bear market and future bear markets, because this won't be the last. 

1. Continue your 401k contributions — with a 20% pullback in the S&P 500 and a 28% pullback in the Nasdaq (as of 7/11 writing) you are in a buyer's market. Stocks are on sale and now is the time to buy, buy, buy. People have countered my "buy now" suggestion, with, “But is this the bottom?" Of course, we'd all like to buy at the bottom, but the market is unpredictable in the short term and timing is more luck than technical analysis. I'll be honest; I have no clue where the bottom will be or if we've already hit it. What I do know is that you are still buying at a deep discount, so seize the opportunity. The great thing about your 401k is that you're buying into the market every pay period. We call this dollar cost averaging (DCA) which is consistently buying into the market at different price points. Maybe you'll get lucky and buy at the bottom during your next payroll deduction. So, continue your contributions and consider increasing them by a percentage or two.

2. Increase equity exposure — now is the time to increase equity exposure, not reduce it. If you are already 100% stocks, then continue to buy stocks. However, if you have some wiggle room, consider increasing your stock allocation by 5%. Stocks will recover and reach new all-time highs again; a higher recovery opportunity will occur in your stock positions. If you are buying equity indexes (like the S&P 500) you are buying great companies with strong fundamentals and deep discounts. There is a high probability that they will still be around after this bear market.

3. Make Roth conversions/contributions — this is a great time to make your Roth IRA contribution or convert funds from your pre-tax retirement account to the Roth. In a market pull back you can convert more shares at a lower taxable cost to you. When the market recovers, as it always does, the earnings and growth will be completely tax-free to you.

4. Reduce expenses — look at your budget and see where you can cut costs. Prepare yourself for what might come (a recession) and/or cut back a bit so you can invest more. As a rule of thumb, you should always have 3-6 months of living expenses in checking/savings. We call this your emergency fund. In an unpredictable and volatile economy, having more cash available is your safety net and essential for comfort and financial security. However, if are confident your job is secure and your emergency fund is strong, then hunker down, tighten spending, and consider investing more into the market. Building up a nice bucket of savings permits you to seize buying opportunities, like a bear market.

5. Don't do anything rash — this is key! Stay invested and focus on what you can control. Far too often I've heard people say, "I am going to pull out of the market until things get better", or, "I'll restart my 401k contributions once I see we are through this." This is the mindset I encourage you to challenge and rethink. Stock market data has found that some of the worst days are rapidly followed by the best, meaning the stock market moves quickly, and panic selling can significantly hurt returns for long-term investors. So, when you're feeling dismal about the market and the economy, that is the time to invest more, maintain those contributions, and ride out the storm. Why? Because, if you're dismal so are other investors, which could mean we are likely nearing the bottom. Also, if you choose to sell at these low moments, you’ve just secured the loss. If you choose not to sell, the loss is only on paper, and tomorrow will be a new day with new values (up or down). You also need to consider that market timing requires two decisions you need to be happy with: 1) The time to sell and 2) The time to get back in. The stress incurred in deciding when to sell and when to reinvest is more detrimental to your mental health than riding out the volatility. Trust me. I’ve witnessed it. So, what can you control during these turbulent times? Your mindset, behavior, and how often to check your portfolio. A great way to ride out the turmoil is to just not look at your accounts and limit your news consumption.

6. Be greedy at the right time —this goes back to timing the market and the all too familiar FOMO, the fear of missing out. Over the last two years, it was easy to look smart when investing. Every stock you purchased went up; new investors were excited and took riskier bets because confidence was high. Investors overbought tech and growth stocks, dove into crypto assets, and invested in non-profitable companies’ IPOs. FOMO reduces our rationality and can put us in riskier situations. Warren Buffet said it best, “Be fearful when others are greedy and greedy when others are fearful.” When FOMO starts to creep in, take a step back and evaluate what’s right for you and your situation (risk tolerance, time horizon, and intention). Some are feeling the impact of this bear market more than others because their portfolios were heavily titled to growth stocks. They also bought at all-time highs. Investors who remained diversified and didn’t overexpose themselves to growth and tech are hurting less. 

In volatile market conditions like this, you have a choice. You can choose to be a victim or an opportunist. A victim mindset personalizes the situation, resulting in emotional decisions and unfavorable reactions – selling at the low and securing the loss. Just know, this isn’t personal! The market is picking on everyone. Choosing to be an opportunist creates possibility and your future self will thank you. 

History and data have proven the buy-and-hold strategy, diversification, continuous saving, and patience create wealth. So, create a relationship with your money that works for you, not against you. Meaning find a strategy that you’re comfortable with. If you are not committed to the work or the strategy, you will make financial decisions that will negatively impact you in the long run. Be okay with the fact that there is no get-rich-quick play in the markets. Yes, there are stories of people who did make a lot of money quickly. However, this also came with high risk and a certain degree of luck.

So, again, focus on what you can control – your spending, mindset, emotions, and exposure to bad news. And if you are feeling like a victim, or you don’t know what to do, talk to a financial planner BEFORE making a rash decision. Think about WebMD! How often have you self-diagnosed yourself with something that is likely incorrect and only caused stress and panic until you met with the doctor?! Speaking with a professional can provide clarity and insight personal to you that a post on the internet cannot.  If you make a new choice about your money mindset and how you treat it, you’ll likely find yourself wealthier sooner rather than later.  

~ Rachel Bubb