- ^GSPC
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Investors haven’t had to deal with much market turmoil over the past several years. The last real “shock” was the 2022 bear market. But even that was a relatively orderly decline, followed by the artificial intelligence (AI) bull market.
There was the COVID-19 pandemic crash in the S&P 500 (SNPINDEX: ^GSPC). But that reversed within months when the government injected a multi-trillion stimulus package into the economy. There was a mini-bear market in late 2018 that took 20% off the S&P 500. That was completely recovered by spring 2019.
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You could argue that you’d have to go all the way back to the financial crisis nearly two decades ago to find the last really face-ripping bear market. The next big bear market is coming. Eventually. It could happen in a year. It might not come for the next 10 years. But history has shown us that the bill usually comes due in time.
You could try to predict when the next bear market will arrive and sell ahead of it. But that requires your prediction to actually be correct, and to accurately assess when and how the markets will react. And let’s not forget that market timing almost never works in investors’ favor.
Here are four simple things you can do now to prepare yourself before it happens.
1. Don’t move your portfolio entirely to cash
When the markets turn ugly, many investors think in black and white. They believe they should either stay invested or exit the market altogether.
In reality, changes to your portfolio should involve tweaks, not 180-degree turns. For instance, you can shift some of your money from a tech ETF to a low-volatility ETF (exchange-traded fund). Or from a growth ETF to a dividend ETF. Those kinds of changes allow you to become a little more defensive while maintaining your long-term asset allocation.
But an aggressive move to cash can result in locking in losses after they’ve occurred and missing out on gains after the recovery has begun. It typically does more harm than good.
2. Make sure you can emotionally handle a 20%-plus decline
The S&P 500 is testing all-time highs, making now a good time to think about how you’ll feel about a bear market. Investors often react emotionally as it’s happening, but thinking about it beforehand might give a better sense of how you really feel.
