How to Survive a Bear Market if You’re Over 50

What is a bear market?

By definition, a bear market is a 20 percent decline from the most recent market high. That last happened in 2022, with the Nasdaq composite, the S&P 500 and the Dow entering the bear cave in March, June and September of that year, respectively.

The carnage within some stocks in the Nasdaq back then was, well, grisly. Netflix shares, for example, plunged 68 percent from a high on Nov. 17, 2021. Online payment company PayPal lost 70 percent from its high, and drugmaker Moderna was down 72 percent.

Overall, the Nasdaq lost 33 percent of its value in 2022. The S&P 500 declined by about 25 percent during its bearish period, which lasted about nine months.

What causes a bear market?

There is no one culprit for bear markets, which is why trying to predict them tends to be futile. But there are some general conditions that tend to unleash the bear.

Rising interest rates. Lenders, whether they are giving you a home mortgage or financing a multimillion-dollar bond offering, like to get their money back. They also want a rate of return that’s higher than inflation. If they think inflation will rise, lenders start raising their interest rates. After all, if you earn 3 percent on an investment and inflation averages 4 percent, you’ve lost a percentage point.

Why is that bad for stocks? Bonds are loans to corporations, municipalities and the U.S. government. If investors can get a relatively good rate (after inflation) on a bond, they will tend to move money out of stocks and into interest-bearing investments, such as government bonds. In addition, higher rates mean that businesses have to pay more for loans, which reduces corporate earnings.

Global tensions. The world is an uncertain place, and sometimes events come out of the blue that cause a stock market sell-off. Exhibit A: The wide-ranging tariffs from the Trump administration that were announced on April 2 rattled the world and sent stocks plunging, pushing the Nasdaq Composite into a bear market. And things could get worse as the escalating trade war makes investors increasingly pessimistic about the U.S. economy's trajectory.

History provides other examples. In October 1973, OPEC (the Organization of the Petroleum Exporting Countries) declared an embargo on oil exports, causing the price of oil to triple in a few months. The price hike affected not only consumers, who had to wait in long lines for gasoline, but also the many companies that relied on oil to make or ship their goods. The bear market that started in January 1973 lasted 69 months and clawed the S&P 500 for a 48.2 percent loss. More recently, the short, sharp bear market in 2020 was caused almost entirely by the onset of the COVID-19 pandemic.

Sobriety. The stock market is a place for optimists: You buy stocks because you think corporate profits will increase, the economy will be healthy and prices will rise. Every so often, however, stock investors get too optimistic, making big bets on stocks that don’t deserve all that money. 

In 2000, for example, investors made huge bets on online companies such as the now-defunct Pets.com. Eventually, investors wised up and realized that those companies were never going to make money, and that started the big bear market of 2000.

It’s entirely possible to have all three factors in play at once. In 2022, interest rates shot up, albeit from very low levels, as the Federal Reserve sought to rein in inflation. The Russian invasion of Ukraine not only made the world a less stable place but also drove up the price of oil for several months. And there had been big moves in dubious stocks, such as video game retailer GameStop.

What to do with your money 

Your reaction to a bear market should depend on your current financial position as well as your goals. 

For example, if you’re 50 years old and plan to retire in 15 years, your best bet may be to keep socking away money in your 401(k) or IRA in the same proportions as you have been. The average bear recovers in three and a half years. In the meantime, if you invest regularly, you hope to be buying stock at progressively lower prices. That’s a good thing: You want to buy low now and sell high later.

If you’re retired, don’t take withdrawals from your stock funds in a bear market unless you have no other choice. You won’t have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.

Instead, most financial planners recommend that you have a “bucket plan.” Consider putting your investments in three buckets: ultrasafe cash investments, such as bank CDs and money market funds; moderate-risk investments, such as bond funds; and high-risk investments, such as stock funds.

Use your cash investments for making withdrawals in volatile markets. Your riskier funds will still get hammered, but you won’t make the situation worse by taking withdrawals that lock in the losses. When your stock funds have recovered, you can replenish your cash and bond buckets — and be prepared for the next bear market.

Now might also be a good time to consult a financial advisor to discuss whether you should make any changes to your retirement accounts, investments and other assets. You can search a certified financial planner in your area on the Let's Make a Plan website.)