It is human nature to want to act. An escape battle, as the old expression says. So, the idea of sitting idle and doing nothing seems counterintuitive. But buy-and-hold has so far been one of the best long-term investment strategies.
However, there are plenty of other ways to take action with your money that fall outside the investing world. Here are three powerful financial planning moves you can make to improve your position in a long-term bear market.
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1. Make sure you have a suitable emergency fund
An emergency fund is a valuable liquid store that can be tapped to pay for unexpected expenses. These expenses can be unknown but tend to be medical emergencies, home or car repairs, or to supplement income in the event of a job loss.
There are different schools of thought regarding 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 option would be a six-month income. Keep in mind that the emergency fund refers to cash and cash equivalents, so the sale of stocks and cryptocurrency does not count towards the payment of emergency costs.
There are many advantages to owning a large emergency fund. These benefits are amplified during a market downturn or recession. Psychologically, the emergency fund removes the pressure caused by falling asset prices because there is no fear that you will sell a stock as big as amazon, It’s down 40% from its all-time high, only to pay for unexpected expenses. If someone is fully invested, they will be exposed to unexpected risks and may be more nervous about falling stock prices because there is no room for error. An emergency fund removes much of that concern.
2. Make a financial plan
An appropriate emergency fund can be an important part of a financial plan. A bear market is the perfect time to reconsider your financial plan. One of the biggest mistakes investors make is setting up the wrong allocation or mismanaging their position weighting. Mismanagement of allocation and weights can accidentally result in exaggerated losses. By making a financial plan, the investor can ensure that he invests the right amounts in the right warehouses and does not expose himself to unnecessary risks.
On the flip side, you may find that you are actually risking very little and may have extra cash to cash in when the market is lower. After all, the dollar invested during a bear market tends to go much further. So making sure you can take the right amount of risk can be a great way to unlock hidden value in your financial plan.
3. Increase your saving rate
A savings rate is an essential part of every financial plan—whether for retirement or a regular brokerage account. By cutting back on spending and increasing your savings rate, you can add flexibility to your financial plan and can even free up more purchasing power to activate when stock values are relatively low.
Aside from cutting back on spending, another great way to increase your savings rate is to take a side hustle. This is not for everyone. But especially for people with fewer responsibilities and a bit of extra free time, dealing with a side hustle can be a great way to build skills, learn something new, and increase income that can be opportunistically hired in a bear market.
It is important not to confuse market timing when increasing your savings rate. Market timing is actively trying to buy shares at a low price and sell them at a high price. An increase in your savings rate reduces spending or increases your income so that you can buy more shares of your favorite companies. In other words, it is simply belated gratification and the realization that buying during a bear market is a good idea.
Take control of your financial well-being
Reducing market jitters by working on a financial plan or facing a side hustle can be a much better use of nervous energy than messing too much with your stock portfolio. Time is the best cure for stocks that have fallen dramatically. Despite the temptation to sell everything and walk away, selling in a bear market has historically been one of the worst decisions an investor can make.
However, it’s easy to feel helpless during a massive sell-off in the stock market, so finding ways to boost your financial health is key. Building a large emergency fund, adjusting your financial plan, and increasing your savings rate are three ways you can feel more in control of your money and set yourself up for future success.
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