These strategies can help position you for success even if the stock market sell-off intensifies.
It’s human nature to want to act. Fight of flight, as the old expression goes. So, the idea of sitting idle and doing nothing seems counteractive. But buying and holding has so far been one of the best long-term investing strategies.
However, there are plenty of other ways to take action with your money that fall outside of the investing world. Here are three financial planning power moves that you can make to better position yourself for a prolonged bear market.
1. Make sure you have an adequate emergency fund
An emergency fund is a liquid store of value that can be tapped into to pay for unexpected expenses. These expenses can be anything unknown but tend to be medical emergencies, home or car repairs, or to supplement income in case of job loss.
There are different schools of thought as to the best size for an emergency fund. Some say three to six months’ worth of expenses. Others say three to six months’ worth of income. But the safest choice is going to be six months’ worth of income. Keep in mind that an emergency fund refers to cash and cash equivalents, so selling stocks and cryptocurrency to pay for an emergency doesn’t count.
There are many advantages to having a sizable emergency fund. And those benefits are amplified during a bear market or a recession. Psychologically, the emergency fund takes the pressure off of falling asset prices because there isn’t the fear that you would have to sell a great stock like Amazon, down 40% from its all-time high, just to pay for an unexpected expense. If someone is fully invested, they are vulnerable to unexpected risks and may be more stressed out about falling stock prices because there is little room for error. An emergency fund takes away a lot of that worry.
2. Make a financial plan
An adequate emergency fund can be a crucial part of a financial plan. A bear market is a perfect time to revisit your financial plan. One of the biggest mistakes that investors make is setting up the wrong allocation or mismanaging their position weightings. Mismanaging allocation and weightings can lead to accidentally amplified losses. By making a financial plan, an investor can make sure that they are investing the proper amounts in the proper buckets and not exposing themselves to unnecessary risk.
On the flip side, you may find that you are actually taking on too little risk and could even have excess cash to put to work when the market is lower. After all, a dollar invested during a bear market tends to go a lot further. So making sure that you can take on the right amount of risk can be a great way to unlock hidden value in your financial plan.
3. Increase your savings rate
A key part of every financial plan is the savings rate — both toward retirement and in a normal brokerage account. By cutting back on spending and increasing your savings rate, you can add flexibility to your financial plan and could even free up more buying power to put to work when equity values are relatively low.
Aside from cutting back on spending, another great way to boost your savings rate is taking on a side hustle. This isn’t for everyone. But especially for folks with fewer responsibilities and a little extra free time, taking on a side hustle can be a great way to build skills, learn something new, and boost income that can be deployed opportunistically in a bear market.
It’s important not to confuse market timing when boosting your savings rate. Market timing is actively trying to buy stocks low and sell them high. Increasing your savings rate is cutting spending or boosting your income so that you can buy more shares of your favorite companies. Put a different way, it’s simply delayed gratification and the recognition that buying during a bear market is a good idea.
Take control of your financial well-being
Alleviating market jitters by working on a financial plan or by taking on a side hustle can be a much better use of nervous energy than tinkering too much with your stock portfolio. Time is the best remedy for stocks that are down big. As tempting as it may be to sell everything and walk away, selling in a bear market has historically been one of the worst decisions an investor can make.
That being said, it’s easy to feel helpless during a stock market sell-off, so finding ways to empower your financial health are key. Building a sizable emergency fund, fine-tuning your financial plan, and increasing your savings rate are three ways you can feel more in control of your finances and also set yourself up for success down the road.