How to Survive a Bear Market in Your 20s, 30s, and 40s

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As a third-generation financial advisor, Tom Stadum carries on the tradition of his grandfather and father by delivering comprehensive financial plans, prudent investment strategies, and timely service.
July 8, 2022

Bear markets often strike fear and financial doubt in people minds, especially if you have never experienced the pain of losing money. It is hard to see your money vanish in such a short period of time that it almost seems overnight. In this post, we will cover why Covid-19 probably wasn’t your first bear market, what a bear market is, how to navigate through a bear market in your 20s, 30s and 40s, as well as a few smart financial ideas that you can implement that will help you turn a bear market on its head.

Why Covid Wasn’t Your First Bear.

Covid-19 likely wasn’t the first real bear market for many millennials and Generation Z, at least in their investment accounts. Many millennial's and Gen Z started investing and trading right after the Covid bear market, which occurred for just over a month in late February and March of 2020. People were bored at home and had a lot of spare cash from either the Feds pumping money into their checking accounts, unemployment checks, extra cash from the pause on student loan payments, new remote jobs, or a combination of these. The Feds did almost everything they could in March 2020 to stop the bear, cutting rates to 0% in just two short weeks and promising to buy $700 billion worth of debt in the form of US Treasury and mortgage-backed securities.

All of this led to a very quick V-shaped recovery (sharp decline followed by a fast and strong recovery of the economy) of stocks and other securities, while some companies, now affectionately named the “work from home stocks” went “to the moon.” This massive recovery led to the Covid Bear being the shortest bear market since 1929, and by a big margin too. The Covid Bear was 33 days long with all other bear cycles lasting at least 2 months, and the average being just over 9 ½ months.

The amount of liquidity (or in plain English, cash) that was injected into the economy gave tens of millions of people the means to buy extra stuff, like stocks. The amount of cash injected was $9,700,000,000,000 ($9.7 trillion). That is a massive number and gave investors and companies the cash to buy…and buy they did. But everyone knew that the party would end one day in the form of inflation.

What is a Bear Market then?

A bear market has a distinct feeling—you will know when you are in one. It’s that sinking feeling in your stomach when you check your investment account and see that you’ve lost 15% this year. Technically speaking though, a bear market is a twenty percent decrease in the stock market, usually applied to large index funds such as the S&P 500, DJIA, or NASDAQ, but can also be applied to the market as a whole. Like a technical bear, you can go through bear markets in your personal life, too. Whether you get laid off, have an unexpected financial emergency or a health scare, bear markets can come in many forms, and you’ll know when you are in one. Back to the technicality of a bear market though.

Bear markets are relatively common, occurring 26 times since the Great Depression. The worst bear market since 1929 occurred relatively recently. It was the dotcom bubble, occurring in early 2000 and leading into the fall of 2001. The dotcom bubble occurred as people were pouring tremendous amounts of money into dotcom-based companies that had no proven track record of success. Even today's giants like Amazon struggled to stay afloat during this time period. Amazon’s initial public offering (IPO) was $18 per share, but during the peak of dotcom bubble investing it peaked over $100 per share. After the bubble popped, Amazon sat under $7 a share. Other companies were not as lucky as Amazon and ended up failing during the dotcom bubble. Most notably, peaked at $14 a share and months later fell to just $0.22 per share. finally went under in November of 2000.

As stated, bear markets are a 20% reduction in an index fund or the market as a whole. The average bear market reduction is 36%. Although that does seem like a huge reduction, historically there is always a recovery. Bull markets on the other hand, on average increase around 114% and last about three times as long as the average bear market (2 years and 8 months vs. 9 ½ months).

So, what can we learn from these technical definitions of bear markets?

  1. They happen fast – markets go down quickly historically, and the recoveries take much longer.
  2. Bear markets don’t care who you are, they come for everyone.
  3. Preparation is key to not only survive but to thrive in a bear market.
  4. Your personal situation can cause a bear market for you as well as the markets.

Being Young and Going Through the Bear Market.

Losing your hard-earned money in a bear market for first time strikes a lot of emotions. Especially when it is near a major life event. For example, buying a home, having your first child, or getting married. Some of the most common emotions that occur when you have lost money to a bear market are fear, unease, loss of patience, regret, and stress. If your emotions and behavior are not properly maintained, they can lead to catastrophic losses, the kind that take years and years to recover from. In today’s world, it’s never been easier to overreact and sell, particularly when things go south quickly. The ease of trading stocks, re-allocating in your 401k and the 24/7 news cycles are great, but they also will inundate you with information that isn’t beneficial. For example, recently, Peloton was all over the news with their poor performance as a company. Peloton is a great company but if you took it from the news cycle, you would have thought that Peloton was the largest, and most important company in the world. Fact of the matter is that Peloton’s issues hardly affect those of us with most of our money in index funds in or 401ks. Fear and greed are what sells in the news, and it’s critical for you to understand what information should be kept and what can be thrown. Unfortunately, this is hard to do. But it’s critical to set yourself up to avoid these large mistakes that can happen during a bear market.

Here are the first three steps to take when you find yourself in a bear:

  1. Relax

Understand your emotions and be skeptical of them. If you feel a strong pressure to sell out, that is probably the time you should be buying. Strong emotions are just that—strong. Know this and move on to the next step.

  1. Talk to someone

Once you identify how you are feeling, talk to someone who is in between you, your personal plan, and your money. Ideally, this would be a financial advisor. If you don’t have a financial advisor, this may be the perfect time to hire one to give you peace of mind and help take advantage of bear market opportunities. If you don’t want to hire an advisor, talk with someone you trust to ensure that what you are thinking actually makes sense.

  1. Move

Moving, financially speaking, can come through in a few different ways. Sometimes it is an active decision to do nothing. Sometimes it’s taking the leap and buying when it’s scary. The key theme here is to keep moving and monitoring how you are doing and connecting that with your future financial self.

  1. Find perspective

When you’re young, have a family and a mortgage, it’s really hard to find yourself in a bear market. But keep things in perspective. More than likely, you have 25+ years ahead of you before needing your money in retirement. And once you are in retirement, your money may grow for another 25+ years. As crazy as it sounds, for young investors, bear markets can be the golden ticket to buy low. But if your bear market causes more damage to you than you ever thought, just remember that hope is not lost. Some of my friends have had terrible things happen—six figure medical bills, buying bad houses, layoffs, etc. It’s hard when it happens (really hard), but just remember to keep moving forward one day at a time.

Following this playbook is challenging, particularly when the circumstances go deeper than you could have imagined. Keep in mind that every single bear market has an end. It’s key to remember the last step of perspective to ensure you can keep moving to make it to the next bull market in your life. Next, here are a few technical things to do when there you are in a bear market.

Smart Things to Do.

Roth conversions

A Roth conversion converts dollars from a Traditional IRA or 401K into a Roth IRA. These dollars are taxed during the year that they are converted, but are not taxed when you take them out of the Roth IRA. Doing a Roth conversion during a bear market may have substantial long-term tax benefits. It’s important to note, though, that converted dollars are added to your yearly gross income. If you and your spouse make $150,000 combined and convert another $200,000, you are taxed as if you made $350,000 that year. In the 2022 tax year, married couples with taxable income up to $172,750 are taxed at 22%, while income between $172,750 and $329,850 is taxed at 24%. Afterwards, though, the next tax bracket jumps to 32%. Understanding the current tax brackets and knowing approximately how much taxable income you’ll have in a given year is an important consideration with Roth Conversions. Also, keep in mind that American citizens are not taxed at a flat tax rate but rather at a progressive tax rate.

Increase Contributions

Increasing contributions can be a great way to increase your earnings in the future. As long as you do your research, find a good company that is able to succeed in the long-run, and plan on holding the shares of that company for a while, you are receiving shares of that company at a discount to previous prices. Dollar-cost averaging is another great way to increase your share count as you purchase shares of a company, no matter the cost. During a bear market, the cost per share is cheaper, which ultimately lowers your average cost per share.

Tax planning is an important part of any financial plan. If you have taken losses in the stock market during the current year, you can write off up to three thousand dollars of those losses on your tax return. Any additional losses you have can be rolled over and used in future tax years. Currently the maximum allowable write off for capital losses is $3,000/year.

The last thing to do is simply to find something to clear your mind. Take a walk, exercise, listen to music, watch a show on Netflix, or spend time with the people that matter most to you. Do anything that you find interesting to get your mind off the market or your recent losses. In my opinion and from personal experience, the worst thing someone can do is constantly watch the market when they are down. Watching the market causes stress and can bring back the emotions that were previously discussed.

What does a Bear Market Ultimately Mean for YOU?

Bear markets are a part of the business cycle and understandably add financial stress. A lot of young investors are finding themselves stuck between a rock and a hard place. You are not alone. If you are struggling with the financial and emotional effects of the current bear cycle, don’t hesitate to reach out to Dan Schuster at Fjell Capital.

About us
Fjell Capital is a leading wealth management firm designed to deliver results for people who desire to be excellent with their finances. Starting at $125/month and a 0.75% asset management fee you can work with Fjell Capital. No asset minimums. Learn more about Fjell Capital here.
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