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Embrace the Bear Market

Embrace the Bear Market

Almost everyone has been going on and on about the coming bear market for some time now. The DJIA and some other major indexes have bounced off a “ceiling” of sorts this year and that definitely got some attention. I am under the impression that many investors are already divesting from risk and securing those gains from 2017 along with anything they could scrounge in 2018, hence the markets’ perceived weakness.

If we assume a bear market is inevitable and getting closer every day, what exactly does this mean for the average person? It really depends on what stage of their life they are in at the moment. Let’s break it down into 4 categories below and I will give a short blurb on each one:

  1. The in-college-soon-to-be-graduated-kids

This group should not be worried too much. In fact, I would say that a bear market WOULD BE AWESOME for them. Why would I say something so intuitively backwards like that? Here’s the short version: I graduated in 2008 and I took the bull by the horns and got lucky. Being a new graduate, I didn’t have time to build up enough credit and saving to buy anything at all before the market crashed, which ultimately was very good because it forced me to buy at the bottom of the market in 2010. I would say the same thing will be true for similar people who will be graduating soon. It will be marginally harder to find a job, but if you do you will be rewarded with 30-50% discounted houses and stocks just like the last time the market crashed! Also you will have a real income and student spending habits, which is the absolute best way to save money ever invented.

That is of course if the bear shows up, which many are doubting. If the bear doesn’t show up, would it even change anything for a new grad anyways? They will still get jobs and start grinding, so probably not.

2. People-Who-Have-Not-Retired-Yet

This is actually 2 groups of people. Those who are young and need let’s say 5+ years until they plan to retire, and people who want to retire within 5 years. The good news is, both groups should stick with the plan they already had. IE those who would not retire soon should continue to invest aggressively while planning to work for the foreseeable future. This group would probably benefit a ton from a bear market in the long run, because saving and investing every penny you can in a bear market while you are fully employed is a killer way to harvest gains. Heck, you might even be able to afford a house when the market is at the bottom. In the meantime, don’t be afraid of what will happen to your retirement savings, you won’t be touching them for a very long time anyways. If you want to retire soon you should have already been dialing down your exposure to volatile markets, and you should already be investing. Your net worth should be able to take at least a 30% hit before you end up back on the street. So, Just keep doing what you are doing and hold hard. If you have provided enough cushion in your funds to tolerate a long term 30% correction then you will be fine, just breathe and don’t buy things you don’t need. You always have the option to keep working during a downturn and sack some more bargain bin stocks if you would like as well, because you haven’t retired yet of course. See, everybody wins.

3. Retirees

Retirees may be the only group of people who would want to watch for a bear market and actually change their investment strategy to counteract it. If you are capable of retiring solely on bond income without touching principal, then you are ok and don’t need to change anything, because this money will not drop in value with the rest of the market.

The problem is, that I doubt everybody is waiting until they can live off of a perfectly safe and ideal bond return of 3%-4% rate of return until retiring. For anybody who has retired and is living off rental income or other stock and bond dividends they could face troubles and end up touching principal if they are not careful. Rental prices will go down in a downturn and put a divot in the portfolio of somebody who owns a rental property. Stock prices and dividends usually go down with company earnings during a downturn, hurting retirees even more. Not a pretty picture. If you are relying on stock and dividend and rental income in retirement, review your finances thoroughly and try to make assumptions about what kind of downturn you can tolerate and still feel safe. Theoretically, if you can weather a 30% downturn in your income for a few years you should be fine. But again, you might have to gasp go back to work or write more for your personal finance site if this doomsday scenario pans out in the worst way.

You know what, when I sit here and write all that out it really does paint a pretty rosy picture. It looks like the worst that could happen here in the good old USA is that somebody who is retired and doesn’t have quite enough of a buffer will need to go back to work for a while. All the other working class people will see a reduction in their daily expenses and an opportunity to buy into a ‘discounted’ market.

Since I was lucky enough to be around through the 2008 crash, I know exactly how to handle a bear market and I would actually welcome another one just to break up the monotony of all the good news and gains of the last couple of years. Believe it or not, it’s actually pretty boring sitting behind a desk all day anyways with all the news sites on repeat and only one coffee house within walking distance.

So I say - bring on the bear! It sounds fun! America needs a new challenge!

 Doesn’t it?

Doesn’t it?

The Real Interest Rate on a Mortgage Depends on Your Tax Bracket

The Real Interest Rate on a Mortgage Depends on Your Tax Bracket