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5 Survival Tips for the Bear Market

It's been a painful year for investors, but focusing on the long term and implementing constructive actions can help weather the turbulence. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Daniel Kern, CFA®, CFP® last updated 8 November 2022 Investors are understandably frustrated by a miserable year in which stocks are in a bear market and bonds have provided no relief. It is hard not to be pessimistic given the long list of concerns that dominate the market outlook – most notably inflation, central bank policy and war in Ukraine. Despite this painful year for investors, it is important to maintain a long-term perspective while taking constructive actions that will help in navigating a bear market.

In October, Stocks Soared. Is the Bear Market Dead?

1 Use an Appropriate Frame of Reference When Evaluating Investments

Investors frequently compare their holdings to the S&P 500 Index, which is not always the appropriate comparative index for an investment strategy. For example, investments outside the U.S., in small-company stocks or in value stocks should be compared to a more relevant benchmark for the investment universe or style. Many investors also are too quick to embrace short-term success or punish short-term failure. According to Oaktree Capital Management's Howard Marks (opens in new tab), "Every portfolio and manager will experience good and bad quarters and years that have no lasting impact and say nothing about the manager's ability."

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2 Take Advantage of Opportunities to Harvest Losses

Bear markets create a lot of "losers" in which current market value is below the holding's cost basis. A silver lining associated with losing investments is the opportunity to realize capital losses to lower future tax liability. Tax loss harvesting involves selling a position that is trading at a loss, creating realized losses that can be used to offset taxable capital gains or a limited amount of ordinary income. Unused tax losses can be carried forward to future tax years. When harvesting losses, it is important to avoid violating the wash sale rule, which disallows losses for current income tax purposes if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale.

3 Distinguish Between Patience and Complacency

Patience is a virtue for investors, as stocks should continue to be viable long-term investments. Complacency, however, can be a trap for investors. There are changes in the investment environment that are likely to last beyond this year's bear market and may necessitate course adjustments for long-term investors. For example, inflation may be a more persistent challenge than deflation over the next decade. Consequently, investors should consider adding investments that provide inflation protection and inflation-adjusted income. The war in Ukraine and rivalry between the U.S. and China will also create long-term investment changes, with winners and losers likely to emerge because of fundamental changes in the investment environment.

4 Avoid Relying Solely on the Recent Past as a Guide to the Future

Most investors assume that bonds provide a reliable counterweight to stocks, as for most of the past two decades, bond prices have tended to rise when stock prices fall.

Where to Put Safe Money Today However, "recency bias" in assuming that negative correlations between stocks and bonds will persist can be a trap for investors. For much of history, in fact, the correlation was positive, with stocks and bond prices advancing or declining together.

5 The Last Tip May Be the Most Important Differentiate Between the Stock Market and the Economy

Stocks tend to bottom several months (at least) before the rest of the victims of a recession. The end of the bear market may occur despite bad news on profits, GDP and payrolls. The turning point in markets often comes when the news becomes "less bad" than investors fear or when worst-case scenarios become less likely. For example, during the early days of the pandemic, markets rebounded strongly after the Fed took decisive action to prevent a liquidity crisis from becoming a solvency crisis and fiscal spending provided support to struggling households.

8 Facts You Must Know About Bear Markets In the current environment, the removal of worst-case scenarios regarding inflation, Fed policy or war could be what turns investor sentiment from pessimism to optimism. Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen, or experience. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser's clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab). Explore More Building Wealth Daniel Kern, CFA®, CFP®Managing Director and Chief Investment Officer, TFC Financial Management Daniel Kern is the chief investment officer of TFC Financial Management (opens in new tab). As chief investment officer, he is responsible for overseeing TFC's investment process, research activities and portfolio strategy. Before joining TFC, Dan was the president and chief investment officer at Advisor Partners, a boutique asset manager in the San Francisco area that managed portfolios for advisers, financial institutions and family offices. He is a contributor to US News & World Report, Retirement Investor.IO and ThinkAdvisor.com and a regular guest on Bloomberg's Baystate Business. Latest Worried About Inflation? You Can Help Protect Yourself From Its Impact Delaying major purchases can help shield present you, and future you could benefit from continuing to invest and contribute to your retirement plans. By Kelly LaVigne, J.D. • Published 13 November 22 What Is Lifetime Income Insurance Worth? A Guaranteed Lifetime Withdrawal Benefit (GLWB) could be just what you need when markets are down and you're worried about future income. By David Blanchett, PhD, CFA, CFP® • Published 12 November 22 You might also like Worried About Inflation? You Can Help Protect Yourself From Its Impact Delaying major purchases can help shield present you, and future you could benefit from continuing to invest and contribute to your retirement plans. By Kelly LaVigne, J.D. • Published 13 November 22 What Is Lifetime Income Insurance Worth? A Guaranteed Lifetime Withdrawal Benefit (GLWB) could be just what you need when markets are down and you're worried about future income. By David Blanchett, PhD, CFA, CFP® • Published 12 November 22 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 Finding Peace of Mind With Your Retirement Income Even in tough times, you can secure retirement income that lets you maintain your lifestyle, lasts a lifetime, adjusts for life events and leaves a legacy for the kids. By Jerry Golden, Investment Adviser Representative • Published 10 November 22 What to Do When an Unhappy Customer Threatens to Ruin Your Rep Some customers go too far when they feel they haven't been treated well, demanding unreasonable make-goods and even resorting to extortion. An attorney offers some advice. By H. Dennis Beaver, Esq. • Published 10 November 22 Rising Interest Rates Change the Math on Pensions for Some Would-Be Retirees Now is a good time to think about when and if to take a lump sum on your pension and what to do with it. Let's explore the pros and cons. By Michael Aloi, CFP® • Published 9 November 22 Counterattack: Tips for Thwarting a Will Contest From contentious relatives to scam artists, wills are not immune to the threat of a contest. If you have an inkling such a fight could be in your estate's future, here are some ways to limit the risk. By Linda Kotis, Esq. • Last updated 10 November 22 5 Steps to a Stronger Financial Plan It's impossible to be right all the time, but a strong plan and constantly assessing where you are can help you pivot when bad things inevitably happen. By Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser • Published 8 November 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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