On March 11th, 2020, the Dow Jones Industrial Average entered bear market territory for the first time in 11 years, followed by the S&P 500 and the Nasdaq the next day. A bear market is defined as a sustained period of downward trending stock prices, often triggered by a 20% or more decline from market highs. Even though bear markets are a normal part of market cycles and to be expected, especially after the unusually long bull market we experienced post-2009, it is natural to feel a bit uneasy about a sudden drop in market values.
Times of uncertainty such as these may fill you with uneasiness and a desire to do something – anything! Instead of selling off all of your investments and hiding your cash in a coffee can in the back yard, here is a list of productive financial actions you can do now to take advantage of a bear market:
- Refinance and Consolidate Debt
As the Fed continues to slash rates, now is a great time to look into refinancing your home. Contact a few mortgage providers and find out how much you can save by refinancing. You may even want to consider transitioning from a 30-year mortgage to a 15-year mortgage, which will likely decrease your new interest rate even more! This action could save you tens of thousands of dollars over the life of your mortgage. Do you have other high interest rate debt, such a credit cards? See if you can consolidate this debt using equity in your home or a lower-rate personal loan.
- Increase your 401(k) Contributions
It may seem counter-intuitive to pump more money into the markets right now, but think of it this way – stocks are on sale! Drops in market value present an opportunity to “buy low” and take advantage of the market recovery in the future. Historically, markets have always recovered from drops and continued to grow and we have no reason to believe that this bear market is any different.
- Open a 529 Account for your Children/Grandchildren
If you haven’t already done so, consider opening a 529 college savings account for you children or grandchildren. If you know you want to help support someone’s college expenses sometime in the future, why not put your money to work for you now so you have more to pay for college later. College is inflating at a rate of around 6% after all – that is 3 times the average rate of inflation for other expenses! For more guidance on saving for college, check out our recent post on education savings tools.
- Invest any Excess Cash
It is wise to keep 12 months’ worth of living expense needs in cash. Anything more than that could be working harder for you elsewhere, especially since interest rates are currently the lowest they have been since 2008. Take a look at the money you have sitting in the bank. If you do not think you will need it for another 5+ years, it might make sense to invest in a diversified mix of risk assets. Also, look at other accounts, such as your HSA. If you have accumulated more than you could possibly use in the next few years for medical expenses, consider investing the excess.
- Rebalance your Investment Accounts
If your desired asset allocation is 60% stocks and 40% bonds, a significant correction in the market will have thrown you asset allocation off. You might be closer to 50/50 in stocks and bonds at this time. Take this opportunity to rebalance your accounts to your desired allocation. You may notice that means buying more stock right now and that is the point! Remember, you want to buy low and sell high. Taking a disciplined approach to rebalancing helps you do just that. In fact, we recommend rebalancing once a year, regardless of what the markets are doing.
- Create a Financial Plan
Maybe you are unsure what your ideal asset allocation should be or perhaps you are having a hard time focusing on what you can control when markets seem out of control. Going through the financial planning process with a CERTIFIED FINANCIAL PLANNER™ is a great way to help you address these questions and concerns. By identifying your goals and the actions you need to take to achieve those goals, you will find it easier to focus on the long-term and worry less about recent headlines.
As always, we recommend that you continue to “stay the course” with your investments. We have no idea what the next 5 days or 5 weeks will look like, but 5 years from now things will likely look better. Hopefully, we have given you a list of tasks to take your mind of the markets and focus on what you can control. Your future self will thank you!