(Daniel Forber)
It is human nature to want to act. Fight on the run, as the old saying goes. So the idea of sitting idly by and doing nothing seems counterproductive. But buy-and-hold has been one of the best long-term investment strategies by far.
However, there are plenty of other ways to take action with your money that are outside the realm of investing. Here are three financial planning power moves you can take to better prepare for a prolonged bear market.
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1. Make sure you have enough emergency funds
An emergency fund is a liquid store of value that can be used to pay for unexpected expenses. These expenses may be unknown, but are often medical emergencies, home or auto repairs, or supplemental income while out of work.
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There are different schools of thought on the optimal size of an emergency fund. Some say three to six months of fees. Others say three to six months of income. But the safest option is six months of income. Remember, emergency funds refer to cash and cash equivalents, so selling stocks and cryptocurrencies to pay for emergencies does not count.
There are many benefits to having a large emergency fund. During a bear market or recession, these benefits are magnified.Psychologically, an emergency fund can reduce the pressure on asset prices to fall because you don’t have to worry about having to sell things like amazon, A 40% drop from an all-time high just to cover unexpected expenses. If someone is fully invested, they are vulnerable to unexpected risks and may feel even more nervous about falling stock prices because there is little room for error. An emergency fund takes away a lot of worries.
2. Create a financial plan
An adequate emergency fund can be an important part of financial planning. Bear markets are the perfect time to revisit your financial plans. One of the biggest mistakes investors make is setting the wrong allocation or mismanaging position weights. Poor allocation and weight management can lead to unintentionally amplified losses. By developing a financial plan, investors can ensure that they are investing the right amount in the right bucket without exposing themselves to unnecessary risk.
On the other hand, you may find that you are actually taking too little risk, and may even have excess cash for work when the market is low. After all, a dollar invested during a bear market tends to go further. So making sure you can take the right amount of risk can be a great way to unlock the hidden value in your financial plan.
3. Increase your savings rate
A key part of every financial plan is the savings rate — including retirement and general brokerage accounts. By spending less and increasing your savings rate, you can increase your financial planning flexibility and even free up more purchasing power to put to work when the stock value is relatively low.
Besides cutting expenses, another great way to boost your savings rate is to take a side hustle. This isn’t for everyone. But especially for those with fewer responsibilities and slightly more free time, a side hustle can be a great way to develop skills, learn new things, and increase your income, which can be deployed opportunistically in a bear market.
It’s important not to confuse market timing when raising the savings rate. Market timing is actively trying to buy stocks low and sell high. Increasing your savings rate is all about spending less or increasing your income so you can buy more stock in your favorite companies. In other words, it’s just delaying gratification and recognizing that buying during a bear market is a good idea.
Take control of your finances
Relieving market jitters by creating a financial plan or starting a side hustle may be a better use of jittery energy than tinkering with your stock portfolio too much. For stocks that have fallen sharply, time is the best remedy. While it may be tempting to sell everything and walk away, selling in a bear market has always been one of the worst decisions an investor can make.
That being said, it’s easy to feel helpless during a stock market sell-off, so finding ways to strengthen your financial health is key. Building a sizable emergency fund, fine-tuning your financial plan, and increasing your savings rate are three ways you can take more control of your finances and set yourself up for future success.
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John Mackey, chief executive of Amazon subsidiary Whole Foods Market, sits on The Motley Fool’s board. Daniel Foelber has no positions in any of the above stocks. The Motley Fool has jobs on Amazon and recommends Amazon. The Motley Fool has a disclosure policy.
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