Bear Market Strategies

Speaker 1 (00:00):

Welcome, everybody to the Retirement Power Hour. My name is Joe Allaria, and this is episode four. And if, as you can see, if you're, you're joining us via video, I'm gonna be joined today by Jay Waters. Jay, welcome back to the show.

Speaker 2 (00:15):

Yep, Joe, thanks for having me, and I'm looking forward to our conversation today.

Speaker 1 (00:19):

So Jay, you were on the first episode, which was back in January, the, the premier of the Retirement Power Hour. So what's, what's been new in your world since?

Speaker 2 (00:27):

Oh, not a whole lot. Been doing a little bit of traveling. Got back from Florida about two, three weeks ago, and then heading out to Myrtle Beach, uh, about a week, week and a half from now. So doing a little bit to travel in this first quarter. Very

Speaker 1 (00:39):

Nice, very nice. What's in Myrtle Beach just for fun? Family, family trip or what? What's going on? Just,

Speaker 2 (00:44):

Uh, just for fun, visiting some friends and then, uh, went when we went to Florida, actually got engaged, so no, no golfing for the warm weather, but, but got engaged. So all, all good everywhere around.

Speaker 1 (00:56):

Yeah. And, uh, I did know that, obviously, but congratulations. We'll, we'll say it publicly. Congratulations to you and your fiance. That's awesome. Thank

Speaker 2 (01:04):

You. What, what about you? What's, uh, new in your world? <laugh>,

Speaker 1 (01:08):

Just looking forward to playing, uh, and getting outside a little bit warm of weather and not being holed up in the house like we are. We're all winter, so that'll be, that'll be nice. Uh, but I did go, uh, we were able to go skiing a few weeks back, so that was a good time. Jackie and I went, so today, Jay, we're talking about bear markets and strategies for a bear market, but I think it's important to, to preface that with the fact that we are not in a bear market. So, um, I've had a lot of conversations with clients as, you know, when they've come in for meetings lately, and it seems like most people think that we are doing worse, or I should say the market, the market is doing worse than, than it actually has. And of course, the market could go back down from where it is today, but we're recording this.

Speaker 1 (01:56):

It's, it's April 4th. And, um, you know, year to date, we, we are not even in the negative double digits at this point in time. So in our world, for the most part, nothing out of the ordinary. We, we love to see black numbers, not red numbers, but, um, for the most part nothing, nothing too, too outta the ordinary. Now, as far as bear markets are concerned, what, what, back when I scheduled this topic, there was the Russia, Ukraine thing had just come out and we thought, hey, we, we easily could be in a bear market, so we wanted to talk about this. I did a presentation, a virtual presentation in 2020 after the covid decline, which was a, a very steep decline, as I'm sure most of those that are watching can remember. But we talked about different things you can do when the market does decline. And we, I guess we should probably start out by defining a bear market. So Jay, I'll just, I'll kick that off to you. Could you explain for all the listeners just what is a bear market?

Speaker 2 (02:58):

Yep. So a bear market is a 20% drop from the most recent high in the market. And same thing for a bull market, right from most recent low, uh, a 20% increase.

Speaker 1 (03:11):

Okay. So, and it sometimes can be confused, right? With, with

Speaker 2 (03:17):

A, yeah, recession. With a recession. We, we see that a lot where they clients or just people in general will tie hand in hand a recession and a bear market. Yeah. Where, you know, again, bear market is a 20% pull down where a recession doesn't really have anything to do with the stock market. It has more to do with GDP and a recession is defined by, you know, two negative consecutive quarters of GDP. So, you know, one way or the other, if we are in a recession, it may not have adversely affected the stock market with the 20% decline. And same thing, we may have a 20% pullback, but we might not be in a recession. So,

Speaker 1 (03:55):

Right. And we saw that in 2020, there was a, a period of time the, the economy was at a complete screeching halt, and the market did come down, but we came out of the bear market pretty quickly, whereas GDP did not recover as well. So they can be correlated, but they're not the same. But nevertheless, there are times when the market does decline 20%, and that is really to be expected. So we wanted to first set the stage of what a, not only what a bear market is, how often do they typically show up, um, and what really any investors should expect when we're talking about being invested in the stock market, what's quote normal and what is, you know, I guess more of a cause for concern. But even when we say things are normal, it doesn't mean that we're robots and we don't, we don't feel the stress of investing in a crisis.

Speaker 1 (04:51):

And that was episode three. So if you wanna hear a lot more about the behavioral side of the investing in a crisis and in a bear market, I would really encourage you to go back and listen to episode three because we spent a ton of time, mark and I were talking about this, mark Allaria here, another advisor at Carson Allaria Wealth Management talking about the behavioral side of investing in a crisis and how to avoid making really big mistakes. But that's not really our focus today. Today's more about strategies that you can use. And so again, we're, we're talking about bear markets and we're gonna kind of go into, well, they're, they're normal, it's expected, but we get it. It's uncomfortable, but sometimes it helps to get a little perspective and look at it from the numbers side. So Jay, I will, uh, I will quiz you a little bit, little pop quiz. I'm not gonna give you any, uh, any hints on this one, but I'm just curious, we're gonna talk about how frequent the different drops are. So if you had to guess, Jay, how frequently does the s and p 500, the standard imports 500, how frequently does it decline by 5% or more? How, how frequently? How many, how many,

Speaker 2 (06:01):

How many times a

Speaker 1 (06:02):

Year? How many times per year? Or how many, how many years? What, what do you think? Yep,

Speaker 2 (06:07):

5%, probably two, three times a year,

Speaker 1 (06:10):

Exactly right. Three times a year. Good. And the length of that decline is about 46 days. So for the market to drop 5% that, that happens on average three times a year. And that's from 1948 to 2017. This is information put out by Capital Group, by the way, capital group.com. We'll put the link in the show notes so you can see all this information. And the same goes for, uh, the 10, a 10% decline that happens about once per year, and 15% happens about once every three and a half years, a 15% or more decline. So Jay, again, what about a 20%, 20% of that bear market? So how often do you think a 20% or more decline has hap how often does that happen on average, going back to 1948,

Speaker 2 (07:00):

Uh, I'm going to get a little wider range, probably six to eight years.

Speaker 1 (07:04):

Six to eight years. Well, I'm gonna give you half credit for that. No, <laugh>, you're exactly right, is six, 6.3 years. So every six, about every six years or just over six years on average, the market will decline by 20% or more. So they are more common than people might think they are. And the biggest thing that we need to avoid, again, talked about it last episode, the biggest thing we need to avoid is a behavioral knee jerk reaction in the middle of that. And what I mean is people getting outta the market, people saying, uh, it's, we're down 20%, this is not good. This is going nowhere fast. I gotta get outta the market because the average 12 month return after a, a steep decline like this, after a decline of 15%, the average 12 month return is, has been 55%. So that's pretty significant. You know, if you look, again, this is going back again, go, you can look at the show notes, you can, you can see where this data comes from. But the subsequent 12 month return after a decline of 15% or more in the market is 55%. So if you get out of the market when things are bad, there's a decent chance that you're gonna miss out on a really, really, really strong return.

Speaker 2 (08:29):

Yeah, I, I couldn't agree more, Joe. And you know, when it, when it comes to, you know, you talking about people maybe jumping out of the market, it's one, it's impossible to time when the market's at its high, but it's also just as impossible to time it when it's at its low, right. To get it right, you'd have to guess correctly, not only on when to sell, but also when to buy back in.

Speaker 1 (08:52):

And it's, yeah, I mean it's when, when the market is going down, and I can think back to 2020 when we're, when the market was down 20, 30%, it feels like it's gonna go down 60%. I mean, things, when things are bad, they feel really bad, right? That's why, that's what causes the first 20% decline. But somewhere along the line, historically things have turned around and, you know, we'll just keep sharing some of these statistics here. The average bull market. So when we talked earlier, the average bull market lasts for 71 months and, and goes up, has gone up, I should say 263% cumulatively. So that's obviously not per year. The average bear market lasts 14 months and goes down an, an average of 33%. So these bear markets lasts nowhere near the, the duration that bull markets last historically speaking. And they go down nowhere near the amount that the bull markets have gone up.

Speaker 1 (10:00):

So that, that's the historical picture and the perspective that we hope that you take away from this, if you're listening, 'cause we are gonna talk about strategies in a bear market, but first just understand these, they're common. They are typically short-lived. When you look at this is a lot of data, you know, this is going back a long time. And I think the mistake that investors can make is, again, they, the market goes down, they take the money out, they wanna wait till things get better and then put their money back in. But guess what, if you do that, you missed the upside and it might, you know, it could very well be too late to regain any of what you missed out on.

Speaker 2 (10:39):

Yeah, and I think it's important to go over those numbers though though, Joe, like we are going over, you know, how long does a bull market last and what's the average on a, on a bear market? Yeah. Because if you, if we educate and if our clients are knowledgeable of those, you know, time periods, then when that time comes it goes, oh, it's almost like, hey, this is supposed to happen. Right? You know, it's nothing out of the ordinary. We know that the market should pull back probably around 20% every 6.3 years, like you said, and it's just right. If you know that those are the expectations, then when that time comes, it's a lot, a lot easier.

Speaker 1 (11:17):

Absolutely. A hundred percent. And we don't have to understand everything, uh, about what makes or drives the market up or down or we don't need to even be experts, but just to, I'm, I'm saying investors listening, don't need to be experts in this. But just if you're out there listening and you know what is to be expected, like you said, Jay, then you're not spooked or freaked out when these things happen. Now, we on the advisor side, obviously are not spooked or freaked out as I typically explain to clients. We know the market's gonna go down, we know we're gonna have bear markets, we just don't know exactly when or why. So when covid struck and the market just dove downward, that was not anything outta the ordinary from a fin, from a stock market point of view. Of course, the covid part of it was very unexpected and very new.

Speaker 1 (12:08):

Um, just like many crises are, there're things that we haven't seen in a long time or things that we maybe haven't seen at all. But the reaction and what happens in the market is not typically something that's unexpected. Um, and another thing to just remember is the market is not this really mystical system that's out there that no one can really understand or, or, or know about it. It's really made up of people and people. Jay, my belief and our belief I think is that people are smart, they are resourceful, they are able to bounce back from big tragedies. And when you, when you tell the top companies in the world or you know, and you throw a challenge at 'em, these are, these are some of the best that we have, some of the best minds. My money is on the fact that they're gonna figure out the sort of new environment and, and figure out how to overcome these challenges, come out with products and solutions that the rest of us and the world still want to buy and still want, you know, even if we do have covid, you know, even if you do have wars abroad or anything, these different challenges that arise my money is that we as a people are gonna continue to innovate and come out with things that other people are gonna want to, to have.

Speaker 1 (13:29):

And that's, that's, that's the market. It's just made up of a bunch of people. And as I've said, if, if someone told me I couldn't be a financial advisor anymore, or because the government came out with a government sanctioned advisor, robot, I'm not just gonna go sit on my bed and, and cry about it and never come out. I might do that for a short time, but I'm gonna use the skills that I have and, and, and innovate and try to, and pivot and come out with something else. And, and there's a lot, lot of people out there that are in those, in that same position and, uh, as a business owner who will do the same. But with that, Jay, let's talk about these strategies. We got five strategies today when we're in a bear market. Again, we are not in a bear market right now, but you might be listening at some point in the future where we are in a bear market.

Speaker 1 (14:14):

If you are, we know it's not comfortable. Uh, it's typically something that's not in your control. So don't, don't fear, but there are a few things that you might be able to do to capitalize on the volatility of the market. And the first one j is tax loss harvesting a strategy that the listeners may have heard about, but it really all stems back to capital gains, um, in a way to reduce capital gains now and for the short term in the future. So can you just explain a little bit about capital gains, what type of accounts a capital gains tax might apply to? Yep.

Speaker 2 (14:50):

So when we talk about tax loss servicing, it's going to apply to brokerage accounts, individual accounts, not, not your IRAs, just individual brokerage accounts. And the way tax loss servicing works is when you, let's take a, take an equity for example, and you, you sell it at a loss, you're going to then use that tax write off or that loss of whatever you incurred, um, basically whatever you bought it for your cost basis, um, minus whatever you lost. And then you can use that to offset some capital gains that you may have from selling an equity that you made money on above your cost basis.

Speaker 1 (15:30):

So we'll just, lemme just pause there just for a second. So these are not IRAs, not Roth IRAs, but when we, when we sell, um, a security, a stock, a mutual fund, and we made money, so we bought it for 10 grand, we sell it, it's worth 15 grand. I had $5,000 of capital gains and then the 5,000 would, I would have to pay capital gains tax on that 5,000 depending on, depending on my income.

Speaker 2 (15:58):

Yep. And the, the brackets you have for capital gains, you know, when we talk in that relation, you know, you have three brackets, you have 0%, 15 or 20%. Um, so when we talk to our people that are, let's say married filing jointly, right? If you make less than 83,350 joint, you're, you're not gonna pay anything on cap gains. If it's anything over that number, you're in the 15% bracket and then anything

Speaker 1 (16:24):

Up, up to 517,200. Yep. Yeah. And then if you're above that, you're the 20% bracket, 20%, right? Yep. Yep. And this is all for 2022 to 2022 tax year. Yeah. Um, and if you're a single filer, and, and, and by the way, uh, we, we will get to this, I guess we should, we should mention this though, that, that these numbers are taxable income. So I'm gonna ask you what the difference is in just a second. But taxable income for a single person, 41,675, if you're below 41,675, then you actually pay 0% capital gains tax rate. But if you're between 41,675 and $459,750, they could have rounded, I feel like <laugh> and made that a lot easier. But you'd pay 15%. So the moral of the story is most people pay 15% capital gains tax. Now, Jay, real quick, because this is based on taxable income. Yep. So what is the difference between taxable income, gross income?

Speaker 2 (17:21):

Yep. So when they look at cap gains on taxable income, you know, that's them saying, okay, you've made your standard deduction, you've taken your maybe some 401k deductions, pre-tax deductions. So it's whatever you're actually getting taxed on at the end of the day, not what that gross number is, not what

Speaker 1 (17:40):

The, it's not not your adjusted gross income. So just because if you're, if you're married filing jointly, let's just say, and you, you had adjusted gross income of a hundred thousand, right? Well, and you even just took the standard deduction.

Speaker 2 (17:55):

Yeah. The, which is 25 9 for this 2022 tax year.

Speaker 1 (17:59):

Yeah. So you, you could still actually be in that 0% range for capital gains, right? Yep. So that, that's just important to differentiate because a lot of these tax strategies really hinge on either gross income, taxable income. So it's important to know that. Now, now we can finally get to talking about tax loss harvesting again. So we talked about what happens if you have a gain. So when the market's down, someone may have an unrealized loss, meaning if they, if they sold their fund, they would realize a loss. And that's kind of what tax loss harvesting is. But why would someone wanna do that, Jay? Because I've always heard don't sell <laugh>. Why would you wanna sell something again, lost from an investment standpoint, you know, I've heard buy low sell high, not buy high, sell low. So why would someone wanna do that? Right

Speaker 2 (18:53):

There? There's a couple reasons, you know, why you'd wanna do it? One of 'em simply could be you're just looking to rebalance your portfolio to the proper allocation and, and saying, Hey, let's, let's capture some of these losses to then offset some of these gains that we may have. The other way or other reason you may do some tax loss harvesting is you, again, you see a good opportunity, even though you are taking a loss on paper, um, then you can reposition that fund or that equity or whatever it is that you sold into something that is kind of similar but not similar. There's

Speaker 1 (19:29):

Not identical. So not identical Yeah. Know. So from an investment standpoint, right, we don't wanna, we don't wanna sell and then, and then just stay out of the market or, or not be invested. So some people might say, well, um, okay, this is great. I have, I have $50,000 of unrealized losses, I'm just across different funds, I'm just gonna sell all of them so I can lock in the loss. I'll just turn around the next day and just buy 'em right back. Can I, can they do that?

Speaker 2 (19:57):

No, you cannot do that. <laugh> IRS knows better than that. They <laugh>, they, so yeah, they do everything they can. So yeah. What what that would be called then is if someone tried to do that, Joe is the wash rule

Speaker 1 (20:09):

Wash sale, right?

Speaker 2 (20:10):

Yeah. Wash sale. So wash sale is, if you were to rebuy those same identical securities within 30 days of when you sold it, um, that you wouldn't be able to take that, that write off,

Speaker 1 (20:22):

Or

Speaker 2 (20:23):

You'd have to, it'd be basically be a wash

Speaker 1 (20:25):

<laugh>. So, so when people try to implement tax loss harvesting, you can't sell it. They can't sell the security of the fund and then buy it right back. So what you had mentioned before, the strategy is you, you sell the position or the positions and you lock in the loss from a tax standpoint, but let's just say you had a BC large cap fund, you know, or just, just a, just a certain sector fund that you could sell. And then again, you could go buy x, y, z large cap fund. Are they the same fund? No. Are they very, very similar? Yes, they're very similar. And you would do that because you don't wanna not be invested, you don't wanna sell and then have that, and then stay outta the market for 30 days and have that fund rebound and then you miss all the rebound.

Speaker 1 (21:12):

Right. There's more, the, the main thing is the investment return. We don't wanna let the tax tail wag the dog here and just say, well, I wanna get the loss. 'cause that's great from a tax endpoint. Yes, it is, but you still lost money <laugh>. So we don't wanna lose, we don't wanna actually lose money. So we wanna stay invested and we can do that by selling the one fund, locking in the loss and then buying something else that's that's gonna keep us in the market. Yeah. And so it's important when you're doing that to try to make sure that, again, you can find something that's gonna, it's gonna capture any rebound that might occur. But then those, those losses, now, now they can go to work for you and they can offset two different things. So what, what would be the first thing that these losses can offset? Jay? Yeah.

Speaker 2 (21:57):

They can offset your capital gains from another sale of another security where you made money on that in your brokerage account. Or it could also be used for any other type of gain, capital gains you may have. It could be maybe a rental property you sold, um, different source of income. You can take that loss and write it off towards something else.

Speaker 1 (22:21):

Right? So maybe I already had gains in that year. Um, or, or maybe I could do this and then I, and then maybe the market rebounds that I'm gonna have gains later in the year. You can do that. Um, actually there's, there's a third, a third option. And, and that's if you don't have any gains in that year, but what about three years from now or four years from now, yeah.

Speaker 2 (22:42):

You can carry forward those losses into the future and then you can also offset your income for that current year of up to $3,000.

Speaker 1 (22:51):

Right? Right. So you can, you can offset any amount of capital gains. Yep. But if you don't have the capital gains, you can offset $3,000 of income. So that's just your wages, whatever. Yep. And then let's just say I have a hundred thousand dollars of, of losses that, that I locked in and no gains in in that year that I did it. So I can lock, I can use 3000 of the losses to offset income and I'm gonna carry forward $97,000 of losses to the next year. That means if the next year I have $97,000 of capital gains, I can, I can trigger all those gains and not pay any capital gains tax because it would, those would wash out. So it get, it puts you in the driver's seat a little bit. Yeah. To, to have a little bit more control and a little bit little bit of protection against the potential tax that you might pay.

Speaker 1 (23:43):

Again, you're not getting outta the market, so it's not hurting you from that standpoint. You're just giving yourself some losses, which could really help if you are in a higher tax bracket. You know, maybe, maybe you're gonna use those losses while you're in your highest earning years. And then when you get to retirement, maybe you don't even have, uh, capital gains, capital gains tax because your income, your taxable income is in the 0% range. So now you got all these losses that can just continue to offset your income at $3,000 a year. So, um, gives you some more options. Now that's loss tax loss harvesting. I wanted to also mention quickly, which is not necessarily a bear market strategy, but tax gain harvesting, which talks to that, it speaks to that 0% bracket that if I am a single person, again, the number for single person, I, I know we're throwing a lot of numbers out at you guys listening, but if I'm a single person, I want to, if I'm under 41,675 in taxable income, then I don't have any, I don't have any capital gains tax.

Speaker 1 (24:48):

I wouldn't owe any capital gains tax. And I've had this come up where single individual clients of mine have had taxable income of maybe 30,000 and they have unrealized capital gains, meaning that they hadn't sold anything yet, but they could sell it. And we've done that. So they're at $30,000 of taxable income. We could sell, you know, 10, 10, $11,000, um, in capital gains triggered that much in capital gains. Yep. And they wouldn't, they wouldn't pay any tax. So you just sell it, buy right back. So there's tax loss harvesting, gain harvesting, but tax loss harvesting is the one during a bear market. Okay, Jay, that was a lot of information on tax loss harvesting. Let's go to the next one, which is Roth conversions. Now what is a Roth conversion? Why is it good to do in a bear market?

Speaker 2 (25:38):

Yep. Well, before I explain like what a Roth conversion is, I think it, it's important to set the table on the difference between probably a Roth and then a traditional IRA. Sure. So traditional IRA you're putting into with pre-tax dollars that you're writing off. So take the write off grows taxable, you pull out taxable Roth IRA, you go ahead and pay the taxes now when you contribute, but then as it grows, it grows tax free and then you can take out tax free. So when we talk about then Roth conversions, you're taking your traditional IRA pre-tax money and converting it to a Roth IRA. So you're moving it from that taxable bucket to that non-taxable bucket.

Speaker 1 (26:23):

Right.

Speaker 2 (26:24):

Um, and then why it makes sense to do it in a down market is whenever you do a conversion like that, that amount that you convert from your traditional IRA to your Roth shows up as income.

Speaker 1 (26:36):

So that is taxable if I move over. So it's taxable. If I move over $50,000 from a IRA to a to a Roth IRA, then I do have to pay taxes on that 50,000 at that time income, ordinary income tax. Right.

Speaker 2 (26:49):

So the, a good way to put a calculation around it is, you know, it's better to, let's say you had a hundred grand in that traditional IRA that you were gonna convert over. So you're gonna have a hundred thousand dollars show up as income Yeah. Through this conversion. Right? Well, if the market's down 20 or 30%, well that's, you know, let's say it's down 30%, now you're converting 70 grand instead of a hundred grand.

Speaker 1 (27:12):

Same amount of shares,

Speaker 2 (27:14):

Same amount of shares, just, uh, the shares are at a lesser value at the point. Sure. Yep. So then you would save, let's say you're in the 22% tax bracket, well you're gonna save 22% then of that 30,000 that you would've converted. Right. Which is about $6,600 in, in taxable dollars that you would've had. Yep.

Speaker 1 (27:34):

Um,

Speaker 2 (27:34):

Which you no longer do. So Roth conversions are, are always usually a, a good idea depending on the circumstance. But if you are already gonna do a Roth conversion, it makes even more sense during a bear market.

Speaker 1 (27:47):

Yeah. Yeah. And, and exactly. They could make sense in any environment, but it's kind of the icing on the cake. It, because whatever, what we expect after the conversion is that the 50,000, the a hundred thousand whatever you moved over, um, let's use your second example Jay. You converted, would you say 70,000? 70,000, you converted 70,000 and that the 70,000 was a hundred shares of a specific fund, right? Well the a hundred shares were just previously worth a a hundred thousand dollars. So what we expect is you convert the 100 shares over and you only pay taxes on the 70,000. The expectation is those shares would rebound back to their original value and then continue to grow. So the $30,000, the potential $30,000 rebound

Speaker 2 (28:42):

Is now tax free. So tax

Speaker 1 (28:44):

Free all is tax free. So before it was all gonna be taxable, the money declined in the IRA, then you moved it over, then it appreciated back in the Roth IRA. Now there's no guarantee that that rebound is gonna happen and when it will happen and all that stuff that's just investing in the market. But the expectation is, like we said at the beginning, these bear markets are temporary or have been and have been short-lived. So the expectation is that yes, things would rebound and I would much rather have growth in a Roth IRA instead of a traditional IRAI want growth in both. If I, you know, if I can, but I want as much as I can in a Roth IRA because all that growth is tax free and that's all my money. The money in a traditional I a not all my money because it hasn't been taxed. And, and the IRS is gonna lay claim to some of that. So moving on, Jay, the next, next strategy. So we've, we've hit tax loss harvesting and we've hit Roth conversions. We've got three more to go. Number three is just portfolio rebalancing. And that could be something that would be good to do in a bear market. Now just explain a little bit if you could, Jay, what is portfolio rebalancing? Yep.

Speaker 2 (29:53):

So especially during a, a bear market portfolio, rebalancing, some sectors may get hit harder than others, right. You have large cap, you have small cap, you have value in growth. Yep. We saw it in 2020, right. Certain sectors got hit much harder than others. Yep. Towards the end of 2020, we saw a huge rebound in, in the value sector that we hadn't seen in a long time. And growth got hit pretty hard. So it's a good opportunity to capture some of those gains by low sell high and then just reallocate or reposition to that proper allocation that yeah. They were initially wanting

Speaker 1 (30:29):

And maybe even stock to bond. You know, 'cause people right, somewhat are familiar with, you know, I've got some stocks and I've got some bonds in my portfolio. The old traditional retiree model, maybe that 60 40, well, let's just say you wanted to be 60 40 going into the crisis. Okay, so you were 60 40. But then once we hit the, whatever the crisis is, your stocks, the 60% got hit harder than the bonds. So then all of a sudden you're sitting at a 50 50 allocation. Well, uh, you're, you're, you wanna be 60 40 and you're 50 50. So in that case, you might say to yourself, well, I'm gonna sell some of the bonds and then move those over to the stock side because I'm too, my allocation is too high in the bonds. It's not high enough in the stocks. So again, buy low, sell high and that's portfolio rebalancing is good to do at any time.

Speaker 1 (31:26):

It, it could be, it could be a good strategy in a, in a bear market. I will tell you it is not comfortable. You know, that's the hardest thing is on the behavioral side. It's just not comfortable to do that because we might see the market down 20% and say, Hey, this is a great time to rebalance and move some bonds in the stocks. Guess what hap guess what could happen after we move more into those stocks? They could go down even more. Yeah. But we believe our, our belief is that again, that that would be short-lived. So it's, it's often to try to separate the emotions out of these decisions and just, you know, rely on logic and uh, but your money is personal and it's hard to do that sometimes. So that's what's good to have, you know, to have an advisor, to have someone who's reassuring you that yes, this is the prudent thing to do.

Speaker 1 (32:14):

All you can do is what's prudent. And my, a lot of people think, well, it's only prudent for me to get outta the market because the market's down 20%. And that would be, that's why it's prudent for me to protect my money. Well, you know, I look at it and say we have over a hundred years of historical data that shows what happens after bear markets. We showed you earlier the average 12 month return following a 15% decline, it's 55%. So in, in our minds we're saying, well no, the prudent thing's not to go to cash. The prudent thing is to, is to buy as much in stocks or get as much in stocks as we possibly can. Yeah. And that's a good segue to our number four strategy, which is simply, if you are in a bear market and you have cash on the side, put your cash to work.

Speaker 2 (33:06):

Yeah. And when we talk about putting cash to work, some people think, you know, and it's easy to do is you see it down 20, the market down 20%, and you say, well I'm just gonna wait for it to go down to 25 or 20, 30%. Sure. Why not <laugh>? And again, it's impossible to time the market not only on when to sell at the peak, but also when to buy back in at the bottom. Right. To where it's just, you pick a point whether, and you say, Hey, this is when I'm gonna start putting my cash to work and I'm gonna start buying stocks. Yeah. 'cause it, it's just impossible to, to the bottom.

Speaker 1 (33:40):

So, so yeah. What I would actually say too is first of all, if you have cash in this environment, you know, or this hypothetical environment that, that we might be in the future, the bear market, um, it might not be a good reason that you do have cash. Because if you have been, if you have been just waiting for this to happen, okay. That, that wouldn't be advised because you could be waiting a very long time. Long time. Yeah. Like we said, I mean in, in 2020 Yeah. The market, we say the market, you know, I, I'm gonna just look at the s and p 500. Um, in 2020 we got down, I wanna say it was about 2300 in the s and p 500. If you look, um, around March, actually, excuse me, 2,500 in the s and p 500 March 23rd, that was, looks like that was the close according to my stock app on my phone.

Speaker 1 (34:32):

So roughly in that ballpark of 2,500, if you said, I'm gonna wait until, 'cause I think this thing's going down much further, right? And I'm gonna wait until the market goes to two grand or two, excuse me. The s and p 500 goes to 2000. Well guess what? That never happened. And since that point in time, March 23rd, 2020 to again through here recently, we're up over 75%. The s and p is up over 75%. So that's 75% that you're not gonna get back Unless, unless we were going to go down again. Which again, it may never happen. Yeah. And the same thing happened after 2008. And the same thing inevitably happened after, you know, every past downturn that we've had. We don't always return to those lows because like we said, it more, the bull market lasts longer. And sometimes even with the decline, you just never get down to those previous lows.

Speaker 2 (35:34):

And, and two things with that Joe, is one, sometimes it, it stings even worse knowing what you missed out on the upside than if you would've rolled that rollercoaster on the downside. So, you know.

Speaker 1 (35:46):

Well, even if it should, even, even

Speaker 2 (35:47):

If you do get it, yeah. Even if you do get it, let's say you do guess it right? And you're like, Hey, you know, I, I got out right before I started dipping down and it, I I saved myself the 30% decline. But you never jump back in and then it goes up 75% again, that sometimes stings worse than the 30% you saved from losing

Speaker 1 (36:07):

It. It probably should sting worse because again, there, how are you gonna get that back? Yeah. The 30 it, at least when the market's down 30%, it stings. But the general consensus, especially in our view is that, hey, this will recover and I'll get back to where I was. When you miss out on the upside because you were sitting on the sidelines, how are you gonna get that back? You never, you never will unless the market comes back down. So that, that's the hardest, to me, that's the hardest decision in investing to make. And you never want to ha, you never wanna force yourself to make that decision of, geez, I just missed out like we're sitting right now. Let's just say, let's just say you're out there. We're gonna give you guys some grace. Those are, that are out there that maybe, you know, we're in that boat after 2020 and you thought the market, you thought the s and p was gonna go down to 2000 and it never did and, and you haven't got back in and we're in 2022 now and we've appreciated 75, almost 80% since that time, since that point in time.

Speaker 1 (37:06):

What are you going to do now? Do you just, do you just chalk it up to yourself and say, look, that was a bad choice. Um, I I messed up. I'm just gonna count my losses and I'm getting back in 'cause I don't wanna miss out on anymore. Or do you again? Do you wait thinking Well surely it's gotta come down at some point. I can't tell you how many times I've heard that. Surely the market's gonna come down at some point. Well it will, but where's it gonna come down from <laugh>? Is it gonna come down from where we are now or is it gonna come down from where we are 50% from now? Yeah. And that's a question that we can't answer. And that's why we would say if you have cash, put it to work, meaning invest it diversified low cost portfolio, get it in the market, get it invested. 'cause you just can't, you never know when that next downturn is gonna come. And if you keep your folks on the long run, it really shouldn't matter. Yeah.

Speaker 2 (37:58):

And to get it and to really quantify and say, hey, the market's gonna come back to that. Like let's say it's 2300 mark in the s and p, that's almost a 50% correction now where before that time it was only really a 30% correction. Right. And 50% corrections. Although they are possible, they're not as, as common as correct your normal 20% correction. Yeah.

Speaker 1 (38:24):

So it's a, it's a tough, it's a tough, tough, tough position to be in. Even if you missed out, you got outta the market for a week because you got spooked on again, war news or whatever it may be. And you know, you saw the market was up 5% and you were out, you know, if you have a million dollars, 5%, that's 50 grand. So if you get back in at that point you're basically saying, man, I I just missed out on 50 grand and all the compounding that can come from it in the future because I jumped out and you're in the same boat. Do I get back in or do I wait? So it, you don't wanna put yourself in that position to make that call. And the la but the last strategy, Jay, just in the sake of time, the last strategy for a bear market is something that is not, not very well known, but it's called a qh FD qualified HSA funding distribution.

Speaker 1 (39:16):

Now this would only apply to people out there that do have an HSAA health savings account. We have, uh, resources on our website@carsonallaria.com about health savings accounts, the benefits. Um, but essentially what this allows you to do is it allows you to transfer money from your IRA over to an HSA or a health savings account. Now the HSA is the only investment vehicle that I know of where you can get a pre-tax. The money goes in pre-tax, so you get a deduction when you put money into an HSA and then it can grow tax free and be withdrawn tax free. So this is similar to the Roth conversion strategy, which is, which we talked about earlier. The benefits in a bear market are similar. If you roll money over from an IRA to an HSA, there's no taxes when you do that. You can do up to, there is a, there is an annual limit, an annual, uh, rollover amount that you can do. Um, but I think

Speaker 2 (40:19):

That, yeah, I think that number is what, 7,100 for. That was a small term. That's 2020 though.

Speaker 1 (40:26):

Yeah, I think we're up to 7,300 now for a family. Yep. For 2022. But, uh, when you do that, and if you did invest, 'cause you can invest the HSA, then that's tax free growth that you can get. So again, whatever the decline on that money, you move it over, then it grows and hey, this might be something to good to do in any environment. So if you've never heard of that or you have an HSA and you would like to be funding it more, but you just haven't been able to, but you've got IRA money out there, this could be a really good strategy, not very well known, but something that could make a lot of sense.

Speaker 2 (41:02):

And you can only do that once in your lifetime. Right Joe,

Speaker 1 (41:05):

Thank you. Yes. Uh, that is very important to know. It is a once literally a once in a lifetime

Speaker 2 (41:11):

Opportunity

Speaker 1 (41:12):

<laugh> opportunity <laugh> literally Yes. Once in a lifetime. Um, and we are not making that up. So Yep. Check that out if you have an HSA or ask us questions. But Jay, that those are the five strategies I can just extend out to anyone listening, anyone listening. Now let me remind you, we're not in a bear market right now for anyone listening in the future that maybe you are in a bear market and you found this episode 'cause you wanted some tips on it. Well, we encourage you to stay the course to take some of these things into consideration to sit down with an advisor. If it's us, if you're a client of ours, again, reach out, sit down, we'll talk through these things. We believe this too shall pass. And it has each and every time that the market has experienced these challenges. And I would, I would again echo that.

Speaker 1 (42:02):

The reason is not because it's just the market and we don't know what it is. And it's a mystical being that no one understands and no, it's people and people are resilient, especially as a, as a group, uh, as a society. We have overcome. We're all still here. We've overcome literally every, every calamity that's that's ever been known to man. We're, we're all, we're still here. And I believe that will continue and I think that bodes well for things like the stock market. So with that, Jay, thank you very much for coming back on the show for episode four. It's always good to have you on and get your insight. Hopefully we can have you back soon. Absolutely. Thanks for having me, Joe. For everybody else, please make sure and visit our website@carsonallaria.com and please as a reminder, share and, uh, share this podcast on Apple iTunes, Spotify, with your friends and family, to anyone that you think might benefit from listening.

Speaker 1 (42:59):

With that, we are looking forward to coming on on our next episode and talking with Scott Carson, who is a former partner and a senior wealth advisor with Carson Allaria Wealth Management. Scott is a 30 plus year industry veteran, and we're gonna be talking about de designing your retirement life. So that's one you, if you're near retirement or you're retired, you definitely want to tune in to that one. So we'll be talking about some interesting things there. With that, everybody, we hope you all are well and we, uh, hope you take care. Until next time, we will talk to you soon. Bye-Bye.