Commentary: Bear Market Blues: How to Maintain a Sense of Financial Control in Uncertain Times.

Between pandemic lockdowns, health scares, controversial policies, and significant inflation with prices soaring, many US investors may feel like they are losing control of their situation. In addition, there is a bear market for stocks with a possible looming recession.

To remain resilient, we can focus on taking care of ourselves—and our families—physically, mentally, and financially. We can act now to prepare for difficult times in the short-term and to protect long-term financial options. We can find a manageable balance between enjoying our money now and saving it for what we need later.

There is good news. Despite the US stock market crash, bear markets are temporary. While each bear market is unique, they last 11 to 12 months on average and then bounce back. since 1957, the S&P 500
has won an average of 2.9% after one month, 5.5% after six months and 23.9% after one year after the start of a bear market. Bear markets offer opportunities for bargain buying and tax management.

Read: Whatever you’re feeling about stocks now, it’s normal bear market pain — and the worst is yet to come

If a recession hits the US, it will also be temporary. Since 1945, the National Bureau of Economic Research has documented 13 recessions, and they lasted an average of 10.3 months. The last significant recession from 2007 to 2009 lasted 18 months.

While economists are in a “wait and see” stance on a recession, now is the time to act and prepare for the potential impact. Here are five ways to manage:

1. Know where you stand financially, starting with cash flow: Are you making enough money each month to cover your expenses? Income minus expenses equals cash flow. When your income exceeds your expenses, you have positive cash flow. You need positive cash flow to pay off debt or increase savings. Is your cash flow positive or negative? You can improve your cash flow by increasing income, decreasing expenses, or a combination of both.

Temporarily prop up your finances by reducing bank balances or topping up your emergency fund.

2. Increase your income: When you’re financially stressed, improve your cash flow by working extra shifts, taking on a second job, or building your side business. With a recession possible, diversifying your income streams provides insurance if you lose your main income. You don’t have to do this forever. Temporarily prop up your finances by reducing bank balances or topping up your emergency fund.

3. Reduce your expenses with an open mind and a critical eye: If you have negative cash flow and are worried about your finances, seriously try to cut costs. With inflation, you can draw on savings to meet rising costs. That’s not sustainable.

Consider all aspects of your life, starting with where you live. How could you reduce your monthly housing costs? Consider temporary or permanent options. Could you rent part of your home to subsidize your mortgage and utilities? Selling your home and excess belongings for a smaller venue or a more affordable location? Working remotely in a cheaper country?

Next, look at transportation and food. Can you sell your vehicle or trade in your newer car for a cheaper model without car payment? More carpooling? Prepare food weekly to avoid ordering takeout? While some of these decisions aren’t easy decisions, especially if you have kids, being proactive and creative can provide additional savings and peace of mind.

4. Find a balance between enjoying your money now and saving for future needs: Life is more than hard work to enjoy later. Living for today while saving for tomorrow is a balancing act with compromises. Visit this cafe if it gets you through the day – and if you have the income to cover expenses. Do you want to go on a family outing? Great, go and enjoy if you have the means. Or enjoy low-cost local activities with family and friends and use the stay’s savings towards a future destination, such as B. Funding your retirement account. Creating memories doesn’t require luxury vacations and fancy restaurants.

5. Use the bear market to improve your tax situation: A bear market is an ideal time to convert a taxable traditional IRA to a Roth IRA. Let’s say you contributed $6,000 to your traditional IRA in 2020. You bought 60 shares of an ETF or mutual fund at $100 per share. In this bear market, the stocks are now $75 each and your total investment is worth $4,500. Although it’s hard to take, this is an opportunity.

When converting a traditional IRA to a Roth IRA, you pay taxes at current value to convert your portfolio into a tax-free asset. Roth withdrawals, unlike a traditional IRA, are tax-free. By converting now, you’ll pay less tax on the new $4,500 value instead of the original cost.

Additionally, you can trim your tax bill by selling depreciated stocks to post a loss. Let’s say you recently sold a rental property that has appreciated significantly in value. They expect a large tax bill for this sale. Knowing this, you can sell shares at a loss to offset the property’s taxable gains.

Or suppose you invested $30,000 to buy 500 shares of a small-cap ETF at $60 per share. The shares are now priced at $45 each, for a total of $22,500. You sell these for a loss of $7,500, a line item on your 2022 tax return. You can then reinvest the $22,500 into a similar small-cap ETF (whose price has also weakened) to stay in the market and still make the get a tax benefit.

The economy and the market take us on wild, unpredictable rides through their cycling. The end isn’t quite in sight this time, but that too will pass. By taking proactive and creative steps to manage this cycle, you’ll be better prepared to meet your current needs and protect your long-term financial health.

Michael J. Garry is a certified financial planner and runs Yardley Wealth Management, LLC in Yardley, PA. He is the author of two books, The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances, and Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.

Hear from Ray Dalio on the Festival of the best new ideas in the money on September 21st and 22nd in New York. The hedge fund pioneer has strong views on where the economy is going.

More: Four fairy tales that stock market investors and economic politicians tell each other

Also read: Should I try to sell my home in this uncertain market or keep it and rent it out? Commentary: Bear Market Blues: How to Maintain a Sense of Financial Control in Uncertain Times.

Brian Lowry

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