There have been 14 bear markets between 1947 and 2022. They happen quite frequently so how can you prepare for the next one?

Since the US stock indices are down around 20% YTD in 2022, this is a good opportunity to review what to do in a bear market if you hope to be successful at reaching your investment goals. Assuming you have a reasonable, low-cost, broadly diversified portfolio and some kind of investment plan, you actually need to do surprisingly little.

Do Nothing

Don't lose your discipline and good investing behavior. The average investor typically buy high in a bull market and then sell low in the bear market. You can beat them by simply doing nothing. Don’t look at your portfolio. Don’t watch financial news. Don’t read the newspaper. Don’t open your investing statements.

Be sure to do a whole lot of nothing during a bear market. Forget trying to time the market and realize that it is time in the market that matters. The money in your retirement portfolio won’t be spent for decades, so invest like it.

Stay the course.

Think about risk

A bear market is the great time where you find out if your risk tolerance is as high as you thought it was.

If your risk tolerance is higher than your asset allocation, a bear market is the time to make your asset allocation more aggressive. You may not be buying low at the market bottom, but you are certainly getting a better price than was available at the last market top.

If you lie awake at night worrying about the money you have lost, that is a sign that your asset allocation is too aggressive. However, now is NOT the time to change to a less aggressive asset allocation. That time is when the bull has reappeared and your losses have been mostly recovered.

Dump Your Investment advisor

I don't advocate for paying for financial advice, but if you are, now is the time to rethink the advisory relationship since you will almost certainly be paying handsome fees for the privilege of letting someone else invest your money for you.

Paying typical fees can have a dramatic effect on the size of your nest egg. After 30 years of earning 8% before fees and paying 1% to an advisor, you will end up with 17% less money than if you did not pay that 1% fee each year. If you learn how to do what your investment advisor does yourself, that is a guaranteed boost to your nest egg that over the long term could easily negate any temporary losses. Don't believe me? See my fee calculator to see how even seemingly small fees can massively impact your portfolio size over the long term with the power of compounding.

Invest More

It might seem counterintuitive, but a large percentage of your long-term investing gains are made during a bear market. Now is the time to be shoving money into the market by the bagful (buy low, sell high). This is not the time to buy a new car, remodel the house, or expand your prized hat collection. Prioritize funding your 401(k), IRAs, and taxable accounts.

It's History Repeating

If you find yourself worrying about the money you lost, this is probably the time for some financial education. Review the history of the stock market. Stock market drops by 5% or more about three times per year, by 10% or more (a correction) about once per year, and by 20% or more (a bear market) once every 3-4 years. Over a 60-year investing career, you will go through 20 bear markets (yikes). Might as well get used to it as this is normal market behavior, even if it stings a bit.

Is this time different though? Chances are very low. There was a bear market in 2000-2002, in 2008-2009, in 2011, in December 2018, in March 2020, and again in the first half of 2022. So you see they are more frequent than you probably thought and it should be no surprise when the next one shows up.

What do you do in a bear market?