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Top 10 Financial Planning Strategies During A Bear Market

Welcome to the bear market of 2020!  Since hitting a peak of 3393.52 on February 19th, 2020 the market (as defined by the S&P 500 Index©) has fallen -32.79% before hitting major support on March 19th near the 2018 low at 2300.  The cause, as we all know, is the spread of the coronavirus Covid-19 around the world.  It’s pretty apparent that most investors underestimated the severity of the economic fallout.

What has surprised even the most experienced investors and market analysts is how quick the market has fallen.  After all, the market went from a 52-week high to a 52-week low in just four weeks!

In this article I don’t wish to dwell on the losses or the negative financial impact this market drop is having on your life.  Instead, I want to discuss financial opportunities that the bear market may be presenting to you that you might want to consider.  I will briefly discuss my Top-10 strategies that can put you on a path to lasting financial success that are best implemented during a bear market.  Remember that 90% of millionaires EARNED their way to that status.  They did it by making smart financial decisions when the opportunity was presented.  Here are some opportunities for you to make some very smart choices for your finances.

#1: Refinance Your Mortgage (If You Have One)

In a completely unprecedented move, the U.S. Federal Reserve announced on Sunday, March 15th that it was lowering the Federal Funds Rate from 1.00% to 0.00%.  The purpose of reducing interest rates to such a drastic level was to spur economic activity to avoid recession.

The Federal Reserve also injected $1.5 Trillion into the financial system to ensure adequate liquidity in the financial markets (especially the bond market) that had suddenly experienced liquidity problems.

What this means for you is that you have a golden opportunity to refinance your mortgage at historically low interest rates and reduce your monthly outgoing expenses.  What could you do with that savings?  Lots.  In the near future here may suddenly be many “deals” on lots of things that you normally spend money on.

While you’re in the process of refinancing your home mortgage, you might also consider rolling your high-interest consumer debts into the new mortgage.  That will also save you considerable interest expenses if you are carrying credit card balances.  Of course, as a financial planner I highly recommend that you never again build up a balance on those credit cards!

#2: Convert A Portion Of Your Traditional IRA Accounts To A Roth IRA

One of the most effective tools I’ve ever seen in reducing your lifetime tax expense is the use of a Roth IRA.  Some households do not qualify for Roth IRA contributions due to income limitations.  But the good news is that there are NO income restrictions at all that would prevent you from converting a portion of your Traditional IRA to a Roth IRA!

When you do a Roth IRA conversion you will be responsible for paying income taxes on the amount you convert.  But, there is no 10% penalty to pay.  Converting a Traditional IRA to a Roth IRA at a low point in the market makes financial sense because you will also make sure you pay the least amount of tax on the eventual distribution of those assets.

Consider this simplified example.  Suppose you are 50 years old and have an IRA with a balance of $200,000 that you intend to begin withdrawing from at Age 66.  You are making annual contributions of $5,000 and expect to earn a consistent return of 7.5%.  Under this scenario you would have about $720,000 at Age 66.

Then suppose after one year there is a bear market that reduces your account from $220,000 to $110,000.   Assuming that you keep making the annual contributions and earn 7.5% annually from that time forward you would have $466,301 at Age 66.  Then suppose you withdrew $38,923 of the account annually so that at Age 90 the account was depleted.

Your lifetime total withdrawals would be $973,084 and your lifetime tax expense (at 25% Fed & State) would be $243,271.  So your lifetime after-tax value would be $739,544.

Now let’s go back to Age 51.  If you had converted the $110,000 IRA balance to a Roth IRA, you would pay an up-front tax bill of $27,547.  Assuming that the tax bill was paid with non-IRA funds then that account balance would grow to the same value of $466,418 at Age 66.  If you withdrew the same amount then your total withdrawals would be the same $973,084 but you would have no tax bill.  You would have reduced your lifetime tax bill by $233,540!  That’s very smart!

Not everyone will benefit from a Roth IRA Conversion.  To see if it would make sense for you, check out the free calculator at:  https://www.bankrate.com/calculators/retirement/convert-ira-roth-calculator.aspx

#3: Tax Loss Harvesting

Reducing your tax bill is always a good idea.  Well almost always.  One of the worst things that can happen during a bear market is watching your stock portfolio go down in value but somehow ending up with a capital gains tax!  If you own lots of mutual funds this can definitely happen because they are forced to sell their stock holdings to fund all the withdrawals from their investors.  Inevitably mutual funds will sell their winners that have racked up the largest gains so they can show good performance numbers.  The investors get a Form 1099 at the end of the year showing a huge capital gain that was distributed to them even though the fund value went down.

A better plan is owning Exchange Traded Funds that allow you to have better control over your cost basis.  If you do need to sell some holdings then you can identify which specific shares you are selling and keep a record of that for tax purposes.  In your portfolio you are likely to have some shares that are losers as well as some that have performed well.  Sell the losers so you can show some capital losses that will offset some or all of your capital gains.  The IRS limits your total capital loss to $3,000 per year.  But if your total capital loss exceeds this amount then you can carry forward the remainder to the following years until it’s all used up.

#4: Get Defensive With Your Investments – Temporarily

After you have sold the “losers” from your stock portfolio, don’t be in a rush to buy more stocks just because they’ve gone down.  The typical bear market lasts about 18 months.  Some have been longer and a few have been a little shorter.  It’s not unusual for a bear market to reach a total loss exceeding 50% – 60%.  If you’ve been through the dot-com bubble or the great Financial Crisis of 2008 then you know what I’m talking about.

Use the proceeds from your stock sales to go into positions that will help offset the risk of your remaining stock holdings.  One of the silver linings of the bear market is that interest rates decline significantly as the Federal Reserve implements measures to stimulate the economy.  The declining interest rate pushes up the value of bonds.  Allocating more of your portfolio to bonds will help your portfolio hold its value better during the bear market.  The percentage of the portfolio that you should allocate to bonds will depend on your own preferences.  I typically recommend to my clients that we shift from an aggressive portfolio to one that is very moderate:  about ½ stocks and ½ bonds.

Also, please remember that not all bonds are created equal.  Not all bonds perform well during a bear market.  At one point during the Great Recession of 2008, high-quality corporate bonds declined about 23%.  So much for balancing risk!

The only asset class that made money in 2008 was government bonds.  Long-Term government bonds gained 36% from August 2008 – December 2008 when investors panicked about the health of the U.S. economy amid a plunging stock market.  Please note that I am not recommending that you rush out to buy long-term government bonds.  By the time you read this you may have already missed the big spike in bond prices as investors rush to buy safe-haven investments.  To be sure, the tide will swing back swiftly out of long-term government bonds back to risky assets once investors feel more confident about buying stocks with growth potential.

Instead, I’m recommending that you simply add a variety of government bonds (short-term, medium-term, and some long-term) to help your portfolio weather the storm that we call a bear market.  Having a diversity of bonds will help your portfolio stay afloat in a sea of bad news.  And that’s all you should be trying to accomplish in a bear market.

#5: Be Ready To Become More Aggressive With Your Investments

Some people have likened a bear market to a forest fire.  When a forest fire happens, it tends to destroy everything in its path.  Forest fires are unpredictable and difficult to contain and control.  But they eventually burn out when all the fuel is exhausted.  What remains after a forest fire is ugly.  There are usually a few trees left alive but even they have black scars.  The forest doesn’t immediately turn green.  It takes time.  The first signs of recovery are the green leaves that shoot up out of the blackened earth that was once the carpet floor of the forest.

Life a forest fire, bear markets and recessions cause significant damage to stocks of all kinds.  Even the highest quality companies are hurt by to declining sales, disruptions in supply chains, employee layoffs, etc.  It’s not unusual for stable companies to see their share prices experience declines of 30% or more.  And it’s not unusual to see some companies completely go out of business.  These are like the trees in the forest who survived but whose bark has been charred black.

The signs of life after a bear market are the aggressive areas of the stock market that begin to exceed their most recent high points.  I like watching the sector Exchange Traded Funds to see how each area of the market is performing.  The sectors can be divided into two main groups:  Aggressive and Stable.

The Aggressive sectors include:  Technology, Consumer Discretionary, Financial, Communications, Industrials, Construction, and Retail.  The Stable sectors include:  Utilities, Consumer Staples, and Healthcare.

The signs of recovery are when the stable sector funds fail to continue hitting successive highs and the aggressive sectors do exceed their most recent highs.  There is a lot of attention that needs to be paid to spot these emerging green leaves sprouting from the burned floor of a bear market.  There are a host of technical market indicators that can be used to help an investor determine when it’s the right time to get aggressive again after hunkering down in defensive positions for a while.

But make no mistake.  At some point in the bear market you will benefit greatly by taking a step out onto the limb of buying stocks that have been beaten up.  It will not be a comfortable thing to do.  And once you do it you may experience further losses.  In other words, you may not be able to buy back into stocks at the perfect time.  You will need to tell yourself that it’s okay to not be perfect at timing the bottom of the market.  It’s okay because nobody else is either!  Not even the professionals who manage billions of dollars of client funds.  Nobody knows when the bottom of the market has been reached until it has already been reached.

If it feels really uncomfortable to buy into stocks after a massive decline then take comfort that you are actually making the right move.  History is on your side.  I would like to share a fond memory from the Great Recession (financial crisis) of 2008.  As markets started to crumble around August 2008 my business partners and I began to sell more of our clients’ risky holdings and added to cash and bond positions.  Things got really ugly in December of 2008 and it looked like the whole financial industry was going to collapse.  Bear Stearns went belly up.  Bank of America almost did as well.  Many U.S. banks and insurance companies needed government bailouts.  Foreign markets had declined 47% in just three months.  Emerging markets slid 56% in the same time.

We avoided some of the worst downside but our clients weren’t completely unscathed.  In January 2009 the market showed some signs of stabilizing and so we allocated our clients back into aggressive positions –  U.S. Growth, Foreign Developed Markets, and Emerging Markets.

Some of our clients questioned our sanity.  It definitely felt uncomfortable – even for us.  The S&P 500 Index declined another 15% after we made these moves.  The market finally bottomed in March 2009 and proceeded to gain 63% through the end of the year.  By the time the year was over these same clients were happy that we got them back into their full allocation to stocks.

Only looking back could we see that 2009 was the beginning of the 12-year bull market that just ended.  We didn’t know where the bottom would be.  We just knew it was close and we used our best guess.  Good thing we guessed pretty well.

My advice is this – you won’t know when the bottom is but you’ll be rewarded for taking a risk by going back into the market and then being patient.  Unless you need your funds very soon (next year or two) then you have time for the market to hit the bottom and go through the growth process back to the lush, green forest it used to be.  Don’t worry about timing it perfectly, just make sure you give it time to do what it always does – recover and grow!

#6: Pay Off Consumer Debts

During a bear market, where can you invest that will pay you over 18% per year?  Nowhere.  But you can save yourself from paying 18% per year if you pay off your credit card balances.  And that’s just as good.  In fact, it’s better!  The reason is because if you invested in something that gained 18% and you sold it then you would have a tax bill to pay.  Your net earnings would be considerably less.  But paying off debt and avoiding an interest expense does not result in a tax bill.

#7: Go Shopping For Real Estate!

Notice that I recommended getting rid of consumer debt.  This is unproductive debt that only costs you in the long run.  There is no benefit from carrying credit card balances.  There is a lot of benefit to getting rid of it.

I definitely recommend adding exposure to real estate that has been beaten up along with the declines in the stock market.  Real Estate is typically a leveraged asset (funded with loaned money) and so when it falls, it falls hard.  People who need to sell real estate because of falling prices sometimes do so in a panicked manner and are willing to take less than market value for their property in order to get out of it.

After real estate markets go through a significant decline, you will want to consider moving from your existing home to a bigger home.  Or perhaps you really love your existing home and want to buy a second home to rent out for income purposes.  The great thing about real estate is that the income on a rental property is usually very predictable.  But that isn’t your only source of financial gain.  Tax laws are favorable for offsetting income with allowable business expenses such as maintaining the property, depreciation, and other deductible expenses.  And to top it off, once the real estate market recovers you will gain from the appreciation of the value of the property.

Investing in real estate isn’t ideal for every single person and so I highly recommend doing your homework before making any commitments.  To buy real estate you will likely need to borrow some funds to do it.  In order to do that you will need to have a good income, a good down payment, and a good credit score.  Paying off your consumer loans will help your credit scores be where they need to be in order to secure the loan you need.

If the bear market/recession is bad enough, there may be opportunities to find short sale or foreclosure opportunities.  In 2008-2009 there were loads of them.  Those who bought during this time did very well financially.  Remember that you make your money at the time you buy, not when you sell.  Warren Buffet

If you are thinking of exploring this opportunity, your first call should be to a trusted mortgage professional.  He or she can tell you what you need to do in order to qualify for the loan and will help you know what your borrowing capacity is.  You will also need to speak with a good realtor who understands the area you are looking at and can sort out the gems from the fools gold.  It is also a good idea to speak to your tax professional to understand the potential impact to your taxes.

#8: Use A Budget!

It’s a well-known fact that most people do not use a financial budget on a regular basis!  The figure for those who do is somewhere in the high 30% range.  It’s also no secret that most Americans have little or no savings.  Is there a correlation?  You bet!

The purpose of a budget is not to assess where your money went at the end of the month.  Rather, the purpose is to proactively direct your income to where it is going to give you the most benefit!  Many financial gurus have repeated the advice to pay yourself first!  Benjamin Franklin coined the phrase, “A penny saved is a penny earned!” in the 1700s.  Of course, a penny back then could actually buy something.  But the principle still holds true.  Saving today generates wealth that is available for use in the future.

In your budget you should have a regular transfer to a savings and investment plan as your #1 priority!  How else are you going to live the life you want to have when you are ready to transition to your golden years?  Doing this consistently is more important than earning the highest possible rate on your investments.  In order for the compounding effect to work its magic, your investment plan needs consistent contributions and lots of time.  This really works.  Just ask any rich family in America.  I guarantee that they have a budget and attribute a great deal of their success to using it to fund their investment plans.

#9: Increase Your Contributions To Your 401(K) Plan And/Or Other Retirement Plans

Speaking of budgets, a bear market is a great time to increase your regular contributions to your retirement plans.  Because it is so difficult to spot the exact perfect moment when the market bottoms you should worry more about investing more when the markets are down.  There’s hardly a better way to do this than tightening your family’s belt and devoting a little more of your paycheck to your 401(k) contribution.  Your contributions will purchase more shares of the funds you own at cheaper prices all along the way.

As was said before, this may not feel comfortable to you.  You’ll need to keep in mind that your 401(k) funds won’t be withdrawn until sometime in the distant future.  Also keep in mind that you will thank yourself ten years down the road that you did this.

#10: Purchase Cash Value Life Insurance

Cash value life insurance policies are not something I recommend to everyone.  There are situations where this product can be the right fit and other situations where it really doesn’t make sense.  What I want to convey here is that it’s better to purchase cash value life insurance when interest rates are low.  The reason for this advice is that insurance companies are required to issue to the prospective buyer an illustration of how the policy is expected to perform during the person’s life.

The illustration will be based off of current interest rates as well as expected changes to interest rates.  The insurance company will use a portion of the insurance premium to invest in securities that pay interest and dividends to the insurance company.  The insurance company then credits the insurance policy cash value with a portion of that income.

Buying life insurance when interest rates are low allows for the insurance company to create an illustration that is sort of a worst-case scenario for your policy.  The projected buildup of your cash value may turn out to be a lot better down the road than what is shown on your initial illustration.  If interest rates climb higher in the future then the insurance company can reinvest in higher-earning securities and pay more to your cash value than was initially expected.

The benefit of owning cash value life insurance is that your policy will eventually be worth more than the amount you contribute to it.  And at some point you will be able to stop paying into the policy altogether.  It will be insurance that pays for itself and the benefit never goes away.

The other benefit is that you can access the cash value on a tax-free basis.  So in that way it can act as a Roth IRA!  If tax rates rise in the future you will be glad to have some sources of cash that you can access without having to pay taxes on it.

These are just a few ideas to help you make some very smart financial decisions in a bear market that will provide you with great benefits down the road.  I’m happy to discuss these, and other, personal financial planning ideas with you to see what makes sense for your personal situation.

My overall message to you is one of hope and eventual prosperity.  Things will get better.  I’m confident in that.


Don Larson, CFP®, MBA


Advisory services offered through Larson Wealth Management LLC, a Registered Investment Advisor and a licensed insurance agency. Custody services provided by SEI Private Trust Company (SPTC), a federally chartered limited purpose savings association. SPTC is a wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal. Securities are not FDIC-insured and are not guaranteed by any bank or financial institution or regulatory agency.  Larson Wealth Management, LLC is not affiliated with SEI Investments Company.

Financial planning strategies discussed in this article are meant to be educational and illustrative in nature and are not a recommendation for your particular situation.  Any third-party institutions or professionals referenced in this article are for educational purposes only and do not constitute an endorsement of their products or services by Larson Wealth Management, LLC. 


About Me

Don Larson, CFP® is the owner and founder of Larson Wealth Management. Don started in the investment advisory industry in 1999 after he graduated from Arizona State University with a Bachelor of Science degree in Business Finance.

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