Storm Shelter

Financial adviser Jerome Rieke likens client reactions to the current bear market to fastening a seatbelt and enduring turbulence in an airplane.

“That’s the kind of nerves we’ve been seeing our clients experience,” says Rieke, who works at the Edward Jones office in Akron. “That’s natural. If you’re a human being, you’re probably going to be nervous regardless of your experience dealing with bear markets.”

The current bear market began in mid-June when S&P 500 prices dropped more than 20 percent from their record highs in January. As of press time in mid-August the value of investments remained down and investors’ worries were up. Rieke offers guidelines to help you weather the financial storm.

Long View

Tensions may be high, but Rieke cautions to not make rash moves. Instead, be patient and get informed.

On average, a bear market tends to last about 13 months, fall about 34 percent and recover in under two years, according to Edward Jones. And if the bear market isn’t associated with a prolonged economic downturn, it tends to last nine months, fall about 28 percent and recover within 10 months, according to Edward Jones. Bear markets can also bounce back abruptly. The most recent one in March 2020 at the start of the pandemic only lasted 11 days. And there are benefits to being invested in a bear market.

“Some of the very best single-day gains come in the middle of a bear market,” Rieke says.

In the bigger picture of the many years that investments are in the market, these are brief periods of turbulence, and waiting it out can help you reap the sometimes substantial gains as the market recovers. He offers an example from an Edward Jones study that if you put $10,000 in the S&P 500 at the start of the 1980s, that money was worth $980,000 as of late 2021. But if you weren’t invested during the 10 best days of stock market growth during that time, your investment was only worth $437,000.

To fare well through a bear market and come out stronger on the other side, it’s important to manage emotions.

“Working with families for over 20 years now, I have found that it’s not so much, How good are your investments? it’s, How great is your behavior?” Rieke says. “Great investment behavior is what will save the day for nearly everyone going through a bear market.”

A financial adviser can help you exercise great investor behavior, and Rieke offers a few suggestions. The simplest one is to lower the number of times you look at your investment statements, say to every other time, to reduce the possibility of responding emotionally and making a bad investment decision. Another way is meeting with your adviser and reassessing your level of comfort with risks in your investment portfolio and your financial goals, including retirement.

“If an investor has too much risk and they’re looking at statements and losing sleep, it’s not worth it,” he says. “Those investors can look for ways to increase the amount of insulation they can have in their portfolio and still be positioned to achieve their longer term goals.”

That could mean migrating toward safer investments, but that should rarely mean completely pulling out of the stock market during a downturn. Rieke explains that puts you in the position of doing the opposite of the golden rule of buying investments low and selling high. Instead, you are selling low and buying high, which could lead to a catastrophic loss.

“While they may have made a move that gives them short-term relief, the long-term consequences … could be devastating,” he says.

Market Smarts

Those who have cash available to invest should do so now because a bear market is a buyers’ market, which means prices are low.

“The type of stocks that typically get put on the biggest discount tend to be growth stocks that can provide significant returns over time,” Rieke says. “That’s a very powerful strategy.”

He recommends buying good-quality, dividend-paying, defensive stocks.

“The bear market lets us buy shares of dividend-paying companies at depressed prices,” he says. “The dividend income that we get from those investments will end up being a higher percentage than before we went into the bear market.”

Sectors that have held up well in the bear market and may still be attractive now are energy, utilities, consumer staples and health care.

Young investors should buy now and let returns recover and grow over time, but older investors might need to strategize more. Rebalancing your portfolio to have less risk exposure could be helpful.

“Some parts of the portfolio are significantly down. Others may be up in value. The bear market is a terrific time for an investor to sit down and look at ways to bring their portfolio targets back to where they were before,” Rieke says. “Getting everything back in balance is a very prudent activity that all investors can benefit from.”

An example he offers is taking some money you might have in international bonds and moving it into high-quality U.S. investment-grade corporate bonds, which could make the fixed income portion of your portfolio more stable over the next several years.

If cash is available, adding more to your portfolio by investing in more stocks can also help get your portfolio back to target levels. Opening a traditional brokerage account at a financial institution can add another vehicle with tax benefits to your portfolio.

Rieke cautions that liquidating assets while their values are down can cause retirees serious long-term consequences. There are a few ways to avoid this situation. Older investors who are transitioning to retirement can try to reduce what they have budgeted to spend from their investment portfolio and allow more time for recovery. Another way is making short-term safer investments. Because of the rising interest rates, short-term fixed-income investments, like certificates of deposit, short-term bonds and exchange-traded funds, are paying more.

“Those investments give the rest of their portfolio breathing room that it needs to get through the bear market, recover the losses and be no worse for the wear,” Rieke says.

Act Now

Remember that investments are only one part of your portfolio, Rieke says. Sit down with your adviser and reassess your financial plan as a whole. If you’ve accumulated enough money for retirement and have valuable assets like real estate, you can greatly decrease your exposure to higher volatility growth investments and eliminate that emotional roller coaster that comes with it.

If you still need more growth during your retirement, you will likely need to stay invested in the stock market, but you might move toward lower volatility, high-quality defensive stocks.

While it’s about growth, investing is also about maintaining a portfolio that doesn’t give you scares and offers you peace of mind about your future.

“Along with your adviser, have an investment strategy that has your portfolio contain the right blend of safety and growth,” Rieke says. “When combined, they’re going to give you the kind of growth you need in bear markets and tough windows of time.”