Opinion: Bear market blues: How to keep a sense of financial control in uncertain times.

There is some good news. Despite the US stock-market’s fall, bear markets are temporary. While each bear market is unique, they tend to last 11- to 12 months on average and then bounce back. Since 1957, the S&P 500 SPX,
-0.08%
has gained an average of 2.9% after one month, 5.5% after six months, and 23.9% after one year following the start of a bear market. Bear markets provide opportunities for bargain buys and tax management.

Read: Whatever you’re feeling now about stocks is normal bear-market grief — and the worst is yet to come

If a recession hits the US, it will also be temporary. Since 1945, the National Bureau of Economic Research has documented 13 recessions, and they lasted 10.3 months on average. The last significant recession from 2007 to 2009 lasted 18 months.

While economists are in a “wait and see” mode regarding a recession, now is the time to act and brace for potential impacts. Here are five ways to manage:

1. Know where you stand financially, beginning with cash flow: Are you earning enough money monthly to cover your expenses? Income minus expenses equals cash flow. When your income exceeds your expenses, you have positive cash flow. You need positive cash flow to pay down debt or increase savings. Are you cash-flow positive or negative? You can improve your cash flow by increasing income, decreasing expenses, or a combination of the two.

2. Increase your income: If you are financially stressed, improve your cash flow by taking extra shifts, getting a second job or building your side business. Given that a recession is possible, diversifying your income streams provides backup if you lose your primary income. You don’t have to do this forever. Take temporary measures to bolster your finances by paying down credit balances or growing your emergency fund.

3. Cut your expenses with an open mind and critical eye: If you have negative cash flow and are worried about your finances, look hard at cutting costs. With inflation, you may be tapping into savings to cover rising costs. This is not sustainable.

Look at all aspects of your life, starting with housing. How could you reduce your monthly housing costs? Think through temporary or permanent possibilities. Could you rent part of your home to subsidize your mortgage and utilities? Sell your home and excess belongings for a smaller place or lower-cost location? Work remotely in a less expensive country?

Next, look at transportation and food. Can you sell your vehicle, or trade your newer car for a less-expensive model, without a car payment? Carpool more? Food prep weekly to avoid ordering takeout? While some of these are not easy decisions , especially if you have children, taking proactive and creative measures can provide additional savings and peace of mind.

4. Find a balance between enjoying your money now and saving for future needs: Life is more than hard work now to enjoy later. Living for today while saving for tomorrow is a balance with tradeoffs. Visit that coffee shop if it helps you through the day — and if you have the income to cover the expense. You want to take a family trip? Great, go and enjoy if you’ve got the means. Or, enjoy low-cost local activities with family and friends, and apply the staycation savings toward a future goal such as funding your retirement account. Creating memories does not require luxury vacations and fancy restaurants.

5. Use the bear market to improve your tax situation: A bear market is an ideal time to convert a taxable traditional IRA to a Roth IRA. Say you contributed $6,000 to your traditional IRA in 2020. You bought 60 shares of an ETF or mutual fund for $100 per share. In this bear market, the shares are now $75 each, and your total investment is worth $4,500. While difficult to stomach, this is an opportunity.

When converting a traditional IRA into a Roth IRA, you pay taxes on the current value to convert your portfolio into a tax-free asset. Roth withdrawals are tax-free, unlike a traditional IRA. By converting now, you pay less tax on the new $4,500 value instead of the original cost.

Additionally, you can trim your tax bill by selling devalued equities to record a loss. Let’s say you recently sold a rental property that appreciated substantially. You expect a high tax bill on this sale. Knowing this, you can sell equities at a loss to offset the property’s taxable gain.

Or suppose you invested $30,000 to buy 500 shares of a small-cap ETF at $60 per share. The shares are now $45 each, for a total value of $22,500. You sell these for a $7,500 loss, a line item on your 2022 tax return . You can then reinvest the $22,500 in a similar small-cap ETF (its price also weakened) to stay in the market while still receiving the tax benefit.

The economy and market, through their cycling, take us on wild, unpredictable rides. This time around, the end is not quite in sight, but this too shall pass. By taking proactive and creative actions to manage through this cycle, you will be better prepared to meet your current needs and protect your long-term financial health.

Michael J. Garry is a certified financial planner who heads Yardley Wealth Management, LLC in Yardley, Pa. He is author of two books, “The Smart Person’s Guide to Financial Planning & Investments: A Simple and Straightforward Approach to Understanding Your Personal Finances, ” and “Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.”

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Also read: Should I try to sell my house in this uncertain market, or keep it and rent it out?