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8 Things to do When an (Eventual) Bear Market Comes

Inevitably, all investors will experience sharp, though temporary, declines in the value of their stock portfolios. This often leads us to ask ourselves, “Should I sell now and get back into the market once this crisis passes?”

Selling out of a well-constructed, thoughtfully diversified equity portfolio in the midst of a bear market is often a mistake.

We understand the temptation, which is why having a plan to take action - the right kind of action - during a bear market can have an immeasurably positive effect on your wealth and the wealth of your heirs.

Here are a few things you can do during the next unpredictable, but inevitable, market decline.

  1. Buy stocks on sale: We love to buy everything on sale – clothes, furniture, groceries, etc.  But when stocks go on sale (fall in price), people sell, often in a panic.  This panic lights the fuse of the bear market. This stampede to sell gives long-term investors the opportunity to purchase great businesses at attractive prices allowing the efficient market to gradually transfer wealth from impatient to patient investors.
  2. Tactically rebalance your portfolio: Temporary market declines give you the opportunity to sell reserve assets and buy assets that have better long-term expected returns. HCM can assist you with this evaluation.
  3. Put cash to work: Today’s 4-5% yields on money market funds have tricked some investors into thinking that cash is a suitable long-term investment. Investing in equities is a better option to have your portfolio outgrow the high inflation rates.
  4. Make Roth conversions: Moving money from a pre-tax environment to a Roth environment becomes cheaper in a bear market. You get to convert more shares of stock for the same tax price when the market has declined, and you will receive the higher future expected returns in a tax-free environment. 
  5. Tax loss harvest: Selling positions with a loss and replacing them with an allowable alternative might give you the opportunity to have deductible losses on your tax return but gains in your portfolio.
  6. Clean up your portfolio: Do you have some individual stocks or expensive mutual funds you have been wanting to sell, but haven’t done so because you didn’t want to pay capital gains taxes? Now is your chance.
  7. Remind yourself that market declines are frequent, often violent, and temporary.
  8. Remember that the financial media gets paid to stir up panic: Our job is to keep a cool head and take advantage of the lower prices offered when stocks do go on sale so we can increase our dividend yields and capture gains when markets regain their composure. Meanwhile, the managers of these businesses we own, as a whole, will continue to make rational decisions about allocating capital to increase profits, in spite of, or even because of, whatever the next “crisis” will be. You might see headlines like “the market got slaughtered.” When this happens, remind yourself that you don’t own “the market” that the hysterical financial media talks about on the news. Your ownership of the market reflects ownership of the best capitalized and most successful companies in the world. 

Return to July 2023 Newsletter

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