Should You Put Cash to Work During a Bear Market?

Published June 21, 2022 

Reading Time: 4 minutes


Written by:

, CFP®
Zoe Certified Advisor

Considering putting your cash to work during a bear market? Time in the market and sticking to your financial plan are your best strategies for success.

It’s an understatement to say that the stock market has been in a rut. It can be jarring to witness your portfolio’s value falling further and further away from last year’s highs, but if it’s of any comfort: a bear market isn’t all bad news! In fact, for savvy investors, steep market declines can give them a chance to take advantage of oversold high-quality stocks.

First off, what exactly is a Bear Market?

A bear market occurs when a market experiences prolonged falls in prices, approximately 20% or more, from the last highest values. They’re often associated with declines in an index like the S&P 500. However, individual stocks or commodities can also be “bearish” if they experience a 20% decline over an extended period – typically two months or more.

There’s nothing wrong with the conventional wisdom of holding tight and riding out lousy market cycles. But for those with higher-than-average risk tolerance and a capacity to take on additional financial risk, a bear market presents an opportunity to be strategic and capitalize on what’s happening. 

Most importantly, as your mind is jumping from article to article, make sure to stay grounded in order to avoid acting impulsively and regretting it later. 

5 Ways to Take Advantage of a Bear Market

Roth Conversion

If you have been eyeing this strategy for some time and hold investments in a traditional IRA, now might be a good time to consider a Roth conversion. That is because a bear market means your account value is likely lower. Executing a Roth conversion at that lower amount means you will pay fewer taxes than if you wait until the market recovers.

In addition, an eventual market recovery would help you to recoup what you end up paying in income taxes due to that conversion. If you think the market will someday rally back to its highs, executing a conversion while in a down market essentially allows you to choose to have that rally happen inside of your tax-free bucket, rather than in your tax-deferred one.

When contemplating a Roth conversion, it is always important to consider whether the increased income will push you into the next tax bracket for the year and whether you can wait out the five-year rule before you need access to Roth funds. However, for those with a long time horizon and the capacity to withstand any future market shocks, the current bear market cycle may present an excellent opportunity to create a tax-free pool of assets for your future self in your later years.

Tax-Loss Harvesting

Investing in a rental property or a small business can provide you with solid cash flow, covering your expenses and netting you a profit at the end of each year. But when such assets are sold at a profit, they often produce significant long-term capital gains tax obligations for their owners.

If you have substantial gains from selling a rental property or business, selling off some of the most beaten-down stocks that you don’t expect to recover any time soon is another way to take advantage of the current bear market. Selling off losers at a time when you have meaningful capital gains elsewhere in your portfolio is known as tax-loss harvesting.

Even in bull markets, not every investment will be a winner. Thankfully, a losing investment often provides you with a tax benefit. Tax-loss harvesting allows you to get those losers out of your portfolio and put them to good use, ultimately reducing your tax liability for the year.

Increase Contributions

If you find yourself flush with cash and looking for a good use for those funds, another way to take advantage of a bear market is simply increasing your contributions to your investment accounts. By increasing your contribution percentage to your workplace retirement account or contributing those funds to your brokerage account, adding a few more dollars while the market is down will help you buy more shares at lower prices. 

There is a reason why CEOs and other top executives of publicly traded companies tend to scoop up large chunks of their company’s shares during market downturns when they believe they are significantly undervalued. That is essentially what you would do by buying more of what you consider a high-quality long-term investment during a bear market. 

This simple dollar-cost averaging can help you build up a position in your preferred investment over time while simultaneously lowering your average purchase price.

Find Balance: Diversify

Bear markets are also an excellent time to rethink how your assets are distributed among various asset classes. Greater diversification in your investments can protect your portfolio’s downside, especially in turbulent times. Incorporating assets that are not generally correlated with the stock market, such as bonds and real estate also help to mitigate some of the risk inherent in any investment portfolio.

Finally, remember that it is important to follow your financial plan. This is a good time to check in with your financial advisor and review the plan you put in place to ensure it still aligns with your short, medium, and long-term goals.

Don’t Panic, Act Mindfully

Resist the temptation to look for shortcuts or make rush decisions. Remember that we tend to get carried away by our biases and fears. This is a good time to review your portfolio to ensure its investments align with your overall risk profile and your capacity for financial risk.

If the money you have invested today is intended to satisfy a medium or long-term goal, then there’s no reason to be thinking short-term. While it is tempting to time the market, it rarely works in one’s favor. That is because it requires you to be correct twice – both when you sell and when you get back in. And that’s no easy task.

When it comes to what will yield higher returns for your portfolio across decades rather than months, the most successful investors tend to be those that focus on time in the market over timing the market.

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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