Should I Put Cash to Work During a Bear Market?

The United States economy, the largest in the world, is expected to shrink in size considerably during this quarter, after a long expansionary period. The economy will likely see a  decrease in sales of products and services across nearly all industries for the first time since the Great Depression. In the first months of the year, we entered a bear market as investors feared the worst. Speculation around the length of the market correction quickly followed, as investors shied away from putting cash to work in such uncertain times.

What 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. Bear markets usually generate investor pessimism and distrust. 

They are often associated with declines in an overall index like the S&P 500. However, individual stocks or commodities can also be “bearish”  if they experience a 20% or more decline over an extended period – typically two months or more.

A Market Miracle?

What the market has accomplished over the past eight weeks is, put lightly, rare. After a 35% drop from its last peak, it has recovered majority of its losses over the past month. This market recovery is supported by the recent economic stimulus injection -without counting the proposals that are being actively discussed in Congress. The market “miracle” arouses skepticism because it challenges theories around bear market recoveries. Typically, the rebounds from the lows tend to be slow, with ups and downs as the market slowly inches forward – contrary to the phenomenon registered in the last two months.

How Should I Proceed?

The economic picture is unclear. COVID-19 presents an unprecedented situation: the global economy is just beginning to open, unemployment has surpassed historic figures, and markets remain volatile. Not to mention the political climate is complex due to it being an election year. Yet letting uncertainty dictate your long term investment strategy is not a plan. Just as you are now focusing on protecting your physical health, the best way to protect your financial health is to avoid making rash decisions. The key is to remain focus on your specific goals. 

Any major financial decisions made during this time should align with your holistic financial plan. It’s the optimal time to focus on the fundamentals of investing, as opposed to trying to rush to cash. A few effective strategies include looking at rebalancing your portfolio and evaluating tax harvesting options. 

Find Balance: Diversify

This is a good time to rethink the way your assets are distributed. Greater diversification in your investments can protect the downside of your portfolio, especially in turbulent times. Remember that it is important to follow your financial plan. In fact, this is a good time to check in with your financial advisor and review the plan you put in place to make sure the plan still aligns with your short, medium, and long-term goals.

Don’t Panic, Act Mindfully

Don’t take shortcuts or rush decisions. Remember that we tend to get carried away by our biases and our fears. This is a good time to review your portfolio to ensure that its risk profile aligns with your risk capacity and tolerance.

Focus on Stability During A Bear Market 

At this time, your investment decisions should be focused on the medium and long-term. While it is tempting to time the market, it rarely works in ones favor. Remember that you have to get right when to get out and when to get back in! Not an 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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