Why millennials shouldn’t fear a recession

Tips for millennials to use a bear market to their advantage.

11 Mar 2020

Key takeaways

  • Bear markets that occur during your working career are good for your financial plan
  • Millennials are adding funds to their portfolios and poised to reap big rewards when the market recovers
  • There are four key ways millennials can take advantage of bear markets

Bear markets needn’t be a threat to financial success. In fact, for the well-prepared, they can be an opportunity to improve long-term returns. Here are some tactics that can help millennials make the most of a bear market.

Bear markets hurt, especially for retirees

Bear markets will often mean a big bite out of retirement savings and investment portfolio values, which can be frustrating and scary, but that’s not necessarily a bad thing for everyone; age is a major factor.

For older investors, who are approaching retirement or already in retirement, bear markets represent a clear and present danger, because they might be forced to sell off their assets in order to pay their bills. Locking in losses can result in permanent damage, putting retirees at risk of depleting their retirement assets faster than expected. This risk is manageable using diversification and holding safe assets to create a “buffer” between spending and market risk, but this protection isn’t free because it will incur a little opportunity cost (missing gains that you could have earned by taking more risk).

For millennials, risk can be reward

Fortunately, bear market “risk” is reversed for younger investors. Despite popular belief, bear markets are a great opportunity for millennials—and all investors in their working years—to invest their hard-earned savings.

This might seem counterintuitive. After all, most millennials (defined as people born between 1981 and 1996, aged 23-38 today) probably have very dismal memories of The Great Recession.1 Even though most faced very few investment losses (they probably hadn’t saved much at the time), many millennials struggled to find employment or saw meager earnings growth during the last recession.

Today, circumstances are different. Many millennials are in their prime working years, earning more money than ever and intent on saving more.2, 3 If a bear market were to occur today, their “negative spending rate”—since they are adding funds to their portfolios—means that they would be buying, not selling, stocks during a recession.

This could mean a handsome tailwind to returns, especially for working-age investors who are adding to higher risk portfolios, since these portfolios’ “worst-case” characteristics (fast and large drawdowns, extended “plateau” periods, and long and slow recovery periods) give savers a longer window of time to put savings to work at bear market prices.

How millennials can make the most of a bear market

Of course, bear markets can still be frustrating, and pose risks, for young people with a long time horizon. By taking commonsense steps today, millennials can enhance their opportunity to take the utmost advantage during a potential bear market.

  1. Make sure you have the right mix before the bear comes. Regardless of how old you are, bear markets pose a much greater risk to poorly diversified portfolios. Sit down with your financial advisor to ensure your investments are well-diversified, and to make sure your asset allocation (i.e., how your money is divided between stocks and bonds) is appropriate for your financial plan. It’s also important that you have some cash, but not too much, to buffer you against bear market risk. If you’re in your working years, you will usually want to put all of your cash to work, other than an emergency fund of about a year of spending in case you become unemployed. If you’re retired, setting about three to five years of cash flow needs in safe assets can protect you against damage from even the worst bear markets.
  2. Don’t buy into the hype. Bear markets are emotional experiences, even if you’re well-prepared. You will hear a lot of doom and gloom, but don’t let short-term concerns and speculation hold you back from pursuing your financial goals. The economy is cyclical, but recessions are rare and usually over quickly. In the last 75 years, the US economy has only been in a recession about 14% of the time, and stocks have only been in a bear market—or recovering from one—about one-third of the time. Stay the course, and continue saving and investing with confidence that you have time on your side.
  3. Save more, spend less. “A penny saved is a penny earned” no matter what markets are doing, but finding ways to ramp up your savings rate during a bear market can pay particularly huge dividends (pun intended).
  4. Don’t panic. To paraphrase famed investor Mark Yusko, financial markets are the only business where, when things go on sale, most of the customers run out of the store. Staying focused on meeting your long-term goals can help you see short-term market turbulence for what it is: a fire sale on funding your retirement.

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