Moves to Consider in a Down Market

hand drawing of growling bear in front of chart

In late September 2022, the bad year for stocks officially hit a bear market. Defined as a 20% drop from previous highs, it has led to the inevitable onslaught of negative articles. Yet while the reasons for this particular downturn may differ from the past, it’s really nothing new unless you’re experiencing it for the first time. Here are some things you can do to keep your wits – and maybe buy a few shares on sale – in the current market.

Control what you can control

Many investors feel out of control during the down markets. If you think about that, it’s not surprising. Most investors took steps to build up their portfolio, whether for retirement or another goal. They took action. Now everyone is saying keep your hands off your portfolio, don’t do anything. And while that may be the right strategy for your long-term goals, there are things you can do to manage your day-to-day life.

Tighten your belt. Maybe it’s because I was raised in a relatively poorer household, but my first instinct when I see prices increasing or financial markets plummeting is to review my spending. This can be at the grocery store, for utilities in your house or apartment, or your more discretionary spending. I don’t usually recalculate my budget; it’s more of let’s combine errands so we save gas or why don’t we have chicken instead of steak (or a can of soup instead of chicken).

Increase your income. A great way to cut down on your heating bill is to be out of your house more. Can you pick up a part-time job after work to provide more money and help reduce your bills?

Review your goals. Sometimes just sitting down and looking at the big picture can help reduce any panic you feel when the markets drop. Do you have a plan in place? Is it working? If not, what in particular is making you feel nervous, and what can you change in your plan to alleviate that?

Do nothing

Like I said above, many financial planners say to do nothing – meaning don’t sell in a panic – if you have a well-thought-out financial plan. The thing you must remember is that while your stocks may be down 20%, you haven’t lost anything until you sell.

Enhance your financial plan

However, if you find yourself not sleeping at night or feeling physically ill, consider making changes to your financial plan. One way to make changes to your plan when stocks are down is to invest in different assets. If your plan doesn’t feel right, put new money into areas that are less risky (if that’s your concern) and then sell out of the riskier investments over time.

Stocks on sale

If you were researching TVs to purchase and the one you liked the most went on sale for 40% off, wouldn’t you be thrilled? Yet there are many quality companies right now with stocks priced 20, 30, even 40% less than recent highs. I’m not suggesting you go whole hog and spend all your cash on stocks right now. In fact, if you’d done that in July you may have just been giving money away due to the drop off in September.

But you can use dollar-cost-averaging as a strategy in down markets as well as rising markets. Say you think XYZ Corp is a bargain; determine a dollar amount you want to invest in that stock, then invest a fixed percentage into it at a set time. For instance, you could think Disney is a bargain, and you want to invest $10,000 in it. You could invest $1,000 per month for 10 months, or $1,000 every other month for 20 months (or any other combination that feels right to you). Instead of trying to time the absolute market bottom, you will buy more shares when the price is lower and fewer when the price rises. Plus you don’t spend all your cash at once so you have some on hand in case you need it.

Harvest those taxes

As an investor, we all make bad decisions. Even Warren Buffett has lamented some of his purchases. If you’ve come to the decision that you simply screwed up, consider selling the stock. Not only will this provide a tax loss for gains you may have realized, it will also free up money for you to use on other stocks. However, don’t let this be a knee-jerk emotion. Many quality company stocks are suffering; make sure you’re selling a stock you that doesn’t meet your goals, not just a stock that’s down.

In or near retirement

If you’re nearing or in retirement, many of the options listed above don’t apply to you. Depending on your plan for retirement income, you may have different buckets (cash, short-term, long-term) that will allow you to spend without too much concern for the overall market. Others may have set up guardrails where you withdraw a smaller percentage for living expenses in a down market. However, focusing on what you can control – watching spending and potentially increasing income – is very important for people on a fixed income.

I try to look at a down market as a time to reflect on my plan and make sure I didn’t allow risky investments to overtake my portfolio. It’s also a time to consider doubling down on my portfolio. But I’m human like everyone else. Sometimes I wonder what I’ve done, whether the plan is right, have I made a mistake? While we may not soon see returns like the last ten years, I believe the US economy will come back and provide growth opportunities for all of us.

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