Investing in the stock market can be a wild roller coaster. You’ll have some really good days and you’ll have some really bad days. Nothing beats the sheer exhilaration of watching your holdings soar! And nothing is more crushing than losing hard earned money! The U.S. has been in a 7 year bull market. Since the lows of 2008, the S&P 500 has rebounded over 230%! While I don’t know if a recession is near or when it will happen, I think it is important to discuss how to survive a bear market.

Stock Market Boom And Bust

The U.S. stock market has been volatile over the past 90 years. Broadly speaking, a ‘correction’ is when the market falls 10% from its peak and a ‘bear market’ is when it falls 20% from the peak.

Over the past 40 years, the S&P 500 experienced four periods of 20% or greater declines:

• The 1980’s recession: 11/28/1980 – 08/12/1982 (622 days): -27.1%
• The 1987 crash: 08/25/1987 – 12/04/1987 (101 days): -33.5%
• The Dot Com bubble: 03/24/2000 – 10/09/2002 (929 days): -49.1%
• The Great Recession: 10/09/2007 – 03/09/2009 (517 days): -56.8%

Further, over the past six years, the S&P 500 experienced four corrections!

• 04/23/10 – 07/20/10 (70 days): -16.0%
• 04/29/11 – 10/30/11 (157 days): -19.4%
• 05/21/15 – 08/25/15 (96 days): -12.4%
• 11/03/15 – 02/11/16 (100 days): -13.3%

Wow! Those are some crazy declines…no wonder some people are afraid the stock market! Check out this table from Yardeni Research to get a list of all of the S&P 500 bear markets and corrections dating back to 1928.

How To Survive A Bear Market

While you never know when a bear market or recession will occur, investors should always be mentally and financially prepared to survive one. Preparation is key to success.

Here are some ways to make it out stronger:

1. Be prepared to lose A LOT of money

70% of successful investing is all about emotional control. More specifically, don’t lose your cool in times of volatility or downward market movement. This is why the most successful investors aren’t necessarily those with the highest I.Q. Even geniuses like Isaac Newton have lost millions in the market!

If we enter into a bear market, you should automatically assume you will lose a ton of money–I’m talking about a 40%+ decline in your equity portfolio!

While that may sound extreme, 40%+ declines have occurred 3 times over the past 45 years.

In bear markets or times of market volatility, I often see people jump out to cut their losses. Bailing in a bear market is a bad thing to do. More often than not people sell close to the bottom.

By preparing yourself mentally for a big loss, you can avoid selling near the bottom and actually do the opposite/smart thing: invest.

2. Hold dry powder (cash)

While I am not recommending people time the market, I think it is a smart idea to hold extra cash in a potential downturn.

I think cash is an underrated investment. I always hear concerns about losing out on inflation or missing out on three of four more years of a bull market. In my experience, fear of missing out is a big fallacy. I’ve lost more money chasing returns than I have keeping it safe in cash or other low-risk investments.

Holding extra cash serves several purposes. First, you never know when or if you might be laid off (especially in a recession) or might need additional liquidity for everyday expenses. It’s good to have an emergency fund available for unforeseen events.

Second, having dry powder to buy more of the market in a downturn is great. Volatility should be embraced and taken advantage of.

I always keep a little extra cash around to deploy in a bear market. I view it as “the market being on sale.” A lot of people rush out to buy clothes or appliances or TVs when they are on sale. Why should the stock market be any different?

3. Identify companies you want to own

Any readers manage a portion of their net worth through an active portfolio? Have you ever looked at some company and thought wow, they have a good product, great management team, and always execute on goals, but the valuation is just a bit too rich?

Well a bear market is a perfect time to pick up stocks “on sale”! Think of it as an after-Thanksgiving Black Friday sale.

Come up with a list of companies you’d love to own and if they crash in the next bear market, pick some up. I have a few in mind already!

Conclusion

While no one knows when the next one will occur, there are many strategies we can implement today to survive the next bear market. Surviving (and thriving) through a bear market is all about preparation. The biggest advice I can give is keep your cool and don’t make decisions based on emotions.

Readers, I would love to hear how you’re preparing for the next bear market (whenever it may come), if at all! Let me know in the comments below!