An Investor’s Guide to Surviving a Bear Market

Every bear market is unique, but the speed and severity of the current market decline has many investors especially unnerved – with good reason. While no one can predict when the markets will stabilize, retirement and wealth strategies expert Matt Sommer offers three steps investors can take today to navigate the current environment.

With the Dow Jones Industrial Average closing at 20,188.52 on March 16, the U.S. stock market is off approximately 31% since its peak in mid-February. Most market watchers define a bear market as a decline of 20% or more from the previous market high. Using this definition, the market is well within bear market territory.

While every bear market is unique, the speed and severity of this most recent market decline has many investors especially unnerved, and with good reason. The COVID-19 crisis continues to unfold at a rapid pace, and the ultimate toll on the global and domestic economy will likely be severe. Although no one can accurately predict when and at what point the markets will stabilize, there are three steps investors can take today to navigate the current environment.

Reset your expectations. Since World War II, there have been 12 bear markets. The average decline as measured on a close-to-close basis was 32.5%. The average recovery – the time it took for stock prices to regain and reach the previous high – was two years.1 Of course, this recovery could be longer or shorter, but investors must dismiss expectations of a rapid rebound. Each bear market is different in terms of the associated losses, duration and recovery periods.

The good news is that most investors’ investment time horizons are typically well in excess of two years. Barring any immediate or short-term liquidity needs that cannot be met with other assets, stock investors may decide to leave their portfolios intact unless they are undone by their emotions. It’s important to remain patient: Investors who have stayed the course have often been rewarded in the long term. The wait this time, however, may be longer than days, weeks or months.

Control what you can. Beyond the stock market, the impact of COVID-19 will likely have significant repercussions in the economy. Some experts are predicting a global slowdown at best and a recession at worst. Given these possibilities, it is imperative for investors to prepare accordingly. Specific steps that can be taken today include establishing or adding to an emergency fund. Most financial planners recommend that an emergency fund be sufficient to meet three to six months of household expenses. With a potential recession on the horizon, investors might consider setting aside enough to cover six to 12 months of expenses. To create another source of short-term capital, homeowners may wish to establish a home equity line of credit. These funds can be drawn in the future, if and when necessary, with interest owed only on the amount withdrawn.

Another way investors can position themselves to weather the potential storm ahead is to improve their monthly cash flow. The drop in interest rates may offer some investors the opportunity to refinance their debts, including mortgages, student loans and credit card balances. Of course, the difference in interest rates must be sufficient to offset any upfront fees. Finally, investors should review their monthly spending patterns. Many states and cities have shuttered restaurants, gyms, movie theaters and other sources of entertainment. Investors may be well served by immediately diverting these dollars into a savings or investment account, as household expenses are likely to drop in the next few months.

Assess your need for advice. The bull market of the last 12 years has contributed to the growing trend of do-it-yourself investing, mostly through strategies that closely track the performance of the broader market. In a challenging investment environment, however, there may not be any substitute for leaning on an experienced, credentialed and empathetic financial professional. The average age of today’s financial professional is about 55. Many of these financial professionals have experienced the Tech Bubble (2000) and the Global Financial Crisis (2008). Approximately one-fifth of financial professionals are 65 or older and guided clients through Black Monday (1987).2 Financial professionals who have lived through these events can offer investors the opportunity to benefit from the lessons they learned and the best practices of prior market dislocations. By no means, however, should younger financial financial professionals be discounted, as they benefit from the professional training and, in many cases, the mentorship of their more tenured colleagues.

Successful investing is more than simply buying stocks or mutual funds that go up in value and avoiding those that go down in value. Instead, the most successful investors are able to use their money to pursue their life’s objectives. These objectives may include protection from the unexpected (risk management), planning for their children’s higher education (education planning), transitioning to a second career or life of leisure (retirement planning) or ensuring the orderly distribution of assets to heirs (wealth transfer planning). Many financial professionals provide these services and more. These types of holistic client relationships are based on goal attainment and not rate of return measures. In fact, financial professionals who offer these services are currently helping their clients determine how the most recent market drop could impact their life goals, if at all.

Finally, one of the most important attributes of a financial professional is his or her ability to listen and learn about their clients in order to make the most appropriate recommendations. According to Vanguard’s Advisor’s Alpha, one of the most important roles financial professionals play is that of “behavioral coach.”3 Behavioral coaching refers to helping clients save a bit extra when the preference is to spend and to invest for the long term when the instinct is to sell. Financial professionals who play this role can help their clients pursue their goals by suggesting several small but consistent moves over time, rather than making a few large bets or predictions.

For additional information, please contact your financial professional or your Janus Henderson representative.

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1Source: “Here’s how long stock market corrections last and how bad they can get.” CNBC, February 27, 2020.

2“Technology, Social Media Critical to Bridging Financial Advisor Age Gap, J.D. Power Finds.” J.D. Power, July 2019.

3The Vanguard Group. “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha,” 2019.