Financial Planning Month and Strategies to Build Wealth in a Bear Market

October marks the beginning of Financial Planning Month, and as the markets continue to slide, it’s important that we evaluate the state of our personal finances. The markets have declined since the beginning of 2022, but it wasn’t until mid-June that we entered an official bear market. While it’s suggested that we’ll come out of the bear market soon, with the average length of a bear market being 289 days, the economy continues to be plagued with numerous challenges from interest rate hikes to soaring inflation.

During times of such high volatility, many investors opt to sit on the sidelines and wait for the storms to pass. But there are more proactive strategies you can put to work in order to grow your investments during turbulent times.

Assess the Expected Duration of Volatility

The first thing any investor should do is evaluate whether the high volatility is temporary, or if it is expected to continue over a longer period of time. Keep a close eye on the VIX. Consistent readings over 20 over several days may indicate that the market is entering a high-risk environment with a lot of volatility ahead. Readings below 20 indicate a more stable environment, where you can be relatively sure that there won't be any sudden fluctuations.

Allocate Towards Bonds

During times of high volatility, it’s a good idea for individuals to allocate more towards fixed-income investments (such as bonds) and stay away from risk-assets (such as equities). Corporate fundamentals and earnings, which were strong at the beginning of the downturn, have held up well so far. Therefore, the risk of default on investment-grade corporate bonds continues to remain relatively low. Solid fundamentals, high rates, and discounted prices create a compelling total return scenario for fixed income once the volatility subsides.

Maintain Liquidity

Fixed income is usually more stable and provides additional balance to your portfolio. Not only will this help you maintain stability, but it will keep money in assets that remain historically more liquid than stocks.

Personally, I always maintain 5-10% of my portfolio in cash, in order to be well positioned to take advantage of new and emerging opportunities. Allocating money towards cash for tactical opportunities can also act as a hedge to prevent you from having to sell during a down market.

Time Your Trading

Try not to trade on days or periods when key economic data is going to be released (e.g., Consumer Price Index release dates, Federal Open Market Committee meetings, jobs data releases, etc.). The markets are usually particularly volatile on such days and can often make big moves in any direction.

It is likely that there are one or more events happening each week that will directly impact the direction of the economy and stock market. To help you keep track of when data will be released, investors should take note of economic calendars, such as MarketWatch in the U.S., and form their own hypotheses of how they anticipate the market will react under different scenarios. Spreading out your trades across several days can also help reduce the outsized impact of one ill-timed trade.

The Takeaway

While I’m optimistic the markets will recover in the coming months, the current bear market shouldn’t cause you to sell off your assets from fear or prevent you from investing. There are many ways to continue your personal finance journey and maintain financial stability, by ensuring that you are well-armed with the proper resources to make informed investment decisions.