How Does a Bear Market Affect Me?

How deep does a stock market’s bear market affect my personal finance? With the stock market being up one day and down the next, I want to clarify that a bear market is normal, but painful while in it. In lamens terms, a bear market is pretty much when the stock market as a whole is overpriced and needs a deep price reduction. It’s like when you see something at Target go on sale and then you see it on clearance. They lowered the price because most likely it was still overpriced when compared to its current value. We see price reductions like this all the time, but when it happens to the stock market it’s not the same. Let’s chat about it.

What’s a bear market?

To start, let’s pull back and explain what a bear market technically means. I want you to be fully aware of what the news is talking about when they say “we’re in a bear market”. What they are actually saying is that the S&P 500 or the DOW Jones has gone 20% down from its 52-week high. Unlike corrections that range from a loss of 10%-19% from the 52-week high. Which historically takes around 4 months to recover. With a bear market, this time frame will take a longer period of time to recover, and will come with more losses ahead. A historic recovery ranges from around 12 months or even 24 months.

How does it affect me?

Now you might be wondering why these terms like bear market even matter if you’re not “really” in the stock market? Now let’s break down how this economic domino effect reaches other areas in your life that you might not realize.

Retirement & Investment

One thing a lot of people don’t realize is that their company’s retirement account is actually invested in the stock market. Same thing for traditional IRAs, Roth IRAs, 529 college savings plans, and many healthcare savings accounts (HSA) accounts. A bear market would also affect your family if your parents and relatives are in retirement or heading into retirement. They may not have enough saved and invested if the economy shrugges into a bear market. It is important to keep your loved ones informed about how the economy is going especially when it’s going down. Because the stock market does fluxuate, it’s imporant to always review your investment mix every 6 months. As you get older the less risky you want to be with your investments and transition from stocks into more concervative investments like bonds.

Employment & Business Owners

When it comes to bear markets, they have a tendency to quickly affect your company and other businesses. The main area of concern is not hitting projected revenues and losing clients. This can affect job cuts, reduced hours, and pause bonuses or raises. This could also put a hold on new hires and fewer people spending money in the economy. This is something we all witnessed during the great recession, where a lot of people lost their jobs and businesses. A big reason to take the health of the economy into consideration is to better position yourself. By saving a hefty emergency fund that’s equivilant to your risk tolerance, job security, and number of people working in your household.

Family & Mental Health

These causes and effects could hurt more than just your personal finances, but your family and mental health. A bear market could position you to drain your emergency fund and make it hard to make ends meet. But most of all it can create tension between spouses and family dynamics. During hard times divorce is on the rise, while births are on the decline. One of the most important things to do before the economy shifts is to protect your financial home by having a standard operating proceedure (SOP) for your finances. To help you create a financial game plan A, B, and C for how your family will pivot as your financial situation changes. Having open communication during hard financial times is a must.

Closing Thoughts

I share all of this to clarify how close to home a bear market could affect your personal finances. This blog post isn’t to scare you, but to make you aware of the financial language being used. I believe that the best way to protect your finances is by understanding what is being said. It’s also very important to mentally prepare yourself for any economic downturn and upturns in the future. We can do this by working together and heal our financial fears and traumas to help us control our emotions around money and not act impulsively.