Opinion: Bear market blues: How to maintain a sense of financial control in times of uncertainty.

Between pandemic shutdowns, health warnings, controversial policies and significant inflation with rising prices, many US investors might feel like they are losing control of their situation. Add to that a bear market for equities, with a possible recession looming.

To stay resilient, we can focus on our physical, mental and financial well-being – and that of our families. We can act now to prepare for short-term tough times and protect long-term financial options. We can find a manageable balance between enjoying our money now and saving for what we need later.

There is some good news. Despite the fall in the US stock market, bear markets are temporary. Although every bear market is unique, it tends to last 11-12 months on average and then rebound. Since 1957, the S&P 500 SPX,
gained an average of 2.9% after one month, 5.5% after six months and 23.9% after one year after the start of a bear market. Bear markets provide opportunities for advantageous buying and fiscal management.

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If a recession hits the United States, it will also be temporary. Since 1945, the National Bureau of Economic Research has documented 13 recessions, and they lasted 10.3 months on average. The last major recession from 2007 to 2009 lasted 18 months.

With economists in “wait and see” mode regarding a recession, now is the time to act and prepare for the potential impacts. Here are five ways to manage:

1. Know where you stand financially, starting with cash flow: Do you earn enough money per month to cover your expenses? Income minus expenses equals cash flow. When your income exceeds your expenses, you have positive cash flow. You need positive cash flow to pay off your debts or increase your savings. Is your cash flow positive or negative? You can improve your cash flow by increasing your income, decreasing your expenses, or a combination of the two.

Take temporary steps to bolster your finances by paying off credit balances or increasing your emergency fund.

2. Increase your income: If you’re financially stressed, improve your cash flow by taking extra shifts, getting a second job, or expanding your side business. Since a recession is possible, diversifying your sources of income is a backup if you lose your main income. You don’t have to do this forever. Take temporary steps to bolster your finances by paying off credit balances or increasing your emergency fund.

3. Cut your expenses with an open mind and a critical eye: If you have negative cash flow and are worried about your finances, seriously consider cutting costs. With inflation, you can tap into savings to cover rising costs. It’s not sustainable.

Look at all aspects of your life, starting with housing. How could you reduce your monthly housing costs? Consider temporary or permanent options. Could you rent out part of your home to subsidize your mortgage and utilities? Selling your excess home and possessions for a smaller place or a lower cost location? Working remotely in a cheaper country?

Then look at transportation and food. Can you sell your vehicle or trade in your newer car for a less expensive model, without car payment? Carpool more? Preparing food every week to avoid ordering takeout? While some of these aren’t easy decisions, especially if you have kids, taking proactive and creative steps can lead to additional savings and peace of mind.

4. Find a balance between enjoying your money now and saving for your future needs: Life is more than hard work now to enjoy later. Living for today while saving for tomorrow is a balance with trade-offs. Visit this cafe if it helps you throughout the day and if you have the income to cover the expenses. Do you want to take a family trip? Great, go and enjoy it if you can afford it. Or, enjoy low-cost local activities with family and friends, and apply vacation savings to a future goal such as funding your retirement account. Creating memories doesn’t require fancy vacations and fancy restaurants.

5. Use the bear market to improve your tax situation: A bear market is the perfect time to convert a traditional taxable IRA to a Roth IRA. Say you contributed $6,000 to your traditional IRA in 2020. You bought 60 shares of an ETF or mutual fund for $100 per share. In this bear market, stocks are now $75 each and your total investment is worth $4,500. Although difficult to digest, it is an opportunity.

When converting from a traditional IRA to a Roth IRA, you pay present value taxes to convert your portfolio into a non-taxable asset. Roth withdrawals are tax-free, unlike a traditional IRA. By converting now, you pay less tax on the new $4,500 value instead of the original cost.

Additionally, you can reduce your tax bill by selling devalued stocks to record a loss. Let’s say you recently sold a rental property that has appreciated significantly. You expect a high tax bill on this sale. Knowing this, you can sell shares at a loss to offset the taxable gain from the property.

Or suppose you invested $30,000 to buy 500 shares of a small cap ETF at $60 per share. The shares are now $45 each, for a total value of $22,500. You sell them for a loss of $7,500, a line item on your 2022 tax return. You can then reinvest the $22,500 in a similar small-cap ETF (its price has also fallen) to stay in the market while benefiting of the tax advantage.

The economy and the market, through their cycles, take us on wild and unpredictable rides. This time the end is not quite in sight, but that too will pass. By taking proactive and creative steps to manage this cycle, you will be better prepared to meet your current needs and protect your long-term financial health.

Michael J. Garry is a certified financial planner who runs Yardley Wealth Management, LLC in Yardley, Pennsylvania. He is the author of two books, “The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances,” and “Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner” .

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