If you’re investing, it’s wise to purchase stocks at a low price and sell them at a higher price, especially during a bear market, which is basically a sale. A bear market occurs when the stock market has dropped by at least 20% from its recent high. In the latter part of 2022, the S&P 500, which is commonly used as an indicator for the overall stock market in the United States, has been around the bear market zone.
When the market is going down, you might feel like buying stocks when they are expensive and selling them when they are cheap. However, this is not a good strategy. It can be hard to continue contributing to your retirement accounts when their value decreases. Additionally, if you are concerned about losing your job during a market downturn, you might want to hold onto your cash instead of investing it.
Should you save your cash or invest more during a bear market? Continue reading to decide which choice suits you best.
Saving vs. Investing in a Bear Market: Which Should You Choose?
To clarify, we are not recommending that you cease investing because of a bear market.
Investing a fixed amount at regular intervals, regardless of the stock market’s performance, known as dollar-cost averaging, has been a successful strategy in the past. It is also wise to take advantage of your employer’s 401(k) match unless you have difficulty paying for essential necessities.
The question is not whether to invest in a bear market but whether to invest additional funds during a bear market or to save the extra cash.
If you have debt with high-interest rates, such as credit cards or private student loans that exceed 6% to 8%, it is best to pay them off first. However, if you have low-interest rates on your mortgage or car loan, it is okay to prioritize paying off these debts later. Remember that in some cases, neither option may be possible until you have paid off your debts.
When to Save More in a Bear Market
During a market downturn, purchasing discounted stocks could be a wise decision. However, there are certain situations where it may be better to hold onto your cash.
Your Emergency Fund Is Lacking
If you don’t have enough money to cover unexpected expenses that may arise in the short term, it won’t be easy to invest and achieve your long-term financial goals.
Ensure you have an emergency fund of at least three months before investing additional funds. The ultimate objective is to save for a six-month emergency fund, but once you have reached the minimum of three months, you have some flexibility. At that point, you could contemplate dividing the additional money between savings and investments.
Having an emergency fund is crucial as it can protect your investments. You may incur losses if you have to sell them during a bear market due to an unforeseen financial requirement. Additionally, if the funds were invested in a retirement account, you could be subject to a 10% early withdrawal penalty and a large tax payment.
You’re Planning a Major Purchase or Expecting Your Expenses to Rise
To avoid the risks of short-term market fluctuations, it is advisable to keep the money that you will need in the next few years out of the stock market. If you are saving up for a big purchase, such as a home or a car, it’s better to put the extra money into savings. Remember that with the possibility of interest rate hikes in 2023, putting more money down now could help you save on your monthly payments later.
If you anticipate a significant increase in your living expenses in 2023, it would be wise to hold onto your money. This is particularly applicable if you live in an area where the cost of rent is rising rapidly or if you are preparing to have a child, as having a more significant amount of cash in reserve would be beneficial.
Please keep in mind that the federal student loan moratorium will end in 2023, and payments will resume at some point. Before using your extra money, consider if you can afford your current expenses along with your future student loan payments.
You’re Worried About a Layoff
If you are employed in a field like tech or real estate that has not been performing well lately, you may risk losing your job to automation, or your company’s financial stability may be in question. In this situation, it is advisable to increase your savings. It is recommended that you build an emergency fund that can cover your expenses for six months before you consider investing your money elsewhere.
When to Invest More in a Bear Market
If none of the three situations mentioned above apply to you, investing more money now might be a good idea. However, it is important to note that you should only invest your extra money during a bear market if the following three conditions are met.
You’re Prepared for an Emergency
It’s important to have emergency savings prepared before increasing investments in order to avoid being forced to sell investments to pay for bills.
Determining a universal guideline for being prepared for an emergency is difficult. The factors that should be considered include one’s age, health, job stability, and number of dependents. If someone is young, healthy, has a stable job, and has no children, they might require a three-month emergency fund. However, if someone is facing health issues, job insecurity, or supporting multiple dependents, even a six-month emergency fund might not be enough, and they may need to save every extra penny they have.
You Aren’t Worried About Short-Term Performance
Attempting to predict the exact bottom of the market is a futile exercise. As of mid-December 2022, the stock market has fallen approximately 20% year-to-date. However, would you be comfortable with that outcome if you were to invest additional funds and the market subsequently dropped by another 20%?
Continue investing as usual if the answer is “no.” Don’t increase your investments simply because you believe you have found the low point.
You Have a Long Time Horizon
If you have a long-term financial goal of 10 years or more, it is possible to invest more in the stock market. However, if you plan to retire soon or need the money for your child’s college education in the near future, it is important to be careful. A poorly timed stock market downturn can severely affect your retirement plans.
If you think you’ll need to take money out in the next few years, it’s a good idea to have extra cash on hand. This means you can cover your expenses without selling your investments when their value is low, which gives them more time to regain their value.