How to Invest for Retirement During a Bear Market

I don’t want anyone to have this bear market.

Many people are losing a lot of money — not just millionaires, but ordinary working people who have salted their savings for years.

It will be even worse for those who lose their jobs in the recession. That can easily happen when the Federal Reserve tries to squeeze inflation out of the economy.

In short, this is a tough moment for the economy and the market, and putting new money into the stock market may seem like the wrong time. Still, I’m proposing not only people like me who are used to buying stock steadily over the years, but also people who are just getting started and are likely to invest decades ahead. For.

In fact, when you are young, investing in the bear market may be great for your future wealth, and perhaps your final retirement.

This may seem counterintuitive, but the logic is simple. Buying at a low price and selling at a high price are the cornerstones of a successful investment. Even if you invest when the stock price is falling, it can prosper if you have a considerable amount of time to rebound.

Moreover, repeating this over many market cycles reveals the benefits of compound interest income. You can make money in addition to the profits of the previous year.

With this investment, you can collect amazing nest eggs.

In my last column, I suggested steps to get started at the following times:

• Pay the invoice first and save enough money in case of an emergency before you endanger your money.

• Buy stocks using cheap, decentralized index funds that track the entire market. Buy bonds when appropriate.

• Treat your investment as a marathon with a much longer goal, preferably for a period of at least 10 years.

Inevitably, my thumbnail summary omitted a lot. Some readers have suggested other issues I’m working on right now in this ongoing guide to getting started as an investor:

• Benefit from the ups and downs of the market through what is known as the dollar cost averaging method.

• Take advantage of the retirement plan at work.

• Use target date funds, but only with tax shelter accounts.

Veteran investors, don’t worry. I’ll return to the issues that plague you in future columns.

Early price cuts

The dollar cost averaging method requires you to invest in the market regardless of whether stocks or bonds rise or fall. In the bear market, average costs are lower and long-term returns are higher.

If you do this carefully and understand the benefits of buying stocks when they are cheap, you may be able to avoid the horrifying feelings that others have when the market is down.

Think about what happens if you start investing in the Vanguard 500 Equity Index Fund, the first commercial equity index fund in July 1980. You’ve probably experienced a nasty bear market that started in November 1980 and lasted until mid-August. 1982. The S & P 500 Index lost 27.1 percent on that stretch. You may want to sell all your stocks and forget about your stock investment altogether.

But let’s say you had Stick to it not only through that bear market, but also through six other markets that have lasted for the next 40 years, including this one.

According to FactSet, initial investment will increase by 6,600 percent, including reinvested dividends. And if you poured money from your salary into the market and resisted the urge to sell throughout those years, your money would have grown brilliantly.

Important prerequisites

Obviously, I’m making a big assumption. History is a rough guide to the future, and the stock market will rise in the long run.

This is a premise, but it’s not crazy. Although stock prices reflect human whims in the short term, we assume that stocks will ultimately have a dominant value.

Its value is based on the profits a company makes as the economy grows. It may be shrinking now, but it will continue to grow in the long run, and I think market prices reflect the real value of corporate stocks.

As Benjamin Graham“In the short run, the stock market is a voting machine,” said Warren Buffett, a professor and mentor at Columbia Business School, but “in the long run, it’s a weighing machine.”

As Buffett has managed, a handful of people have the time, training and talent to study individual companies and stocks and make bold investments in them.

However, for most people it makes more sense to avoid it altogether and invest in the entire stock market through an S & P500 or another index fund that tracks a wide range of stock lists. If you take this approach and run it regularly over the years, you will be engaged in the dollar cost averaging method.

Workplace planning

about Two-thirds According to the Bureau of Labor Statistics, severance pay is available at all types of US private sector employees.

Traditional pension schemes are becoming more and more rare. They have been superseded by the 401 (k) plan and its cousins, all known as defined contribution plans. Unlike traditional pensions, these plans will pay you nothing unless you invest in them. In essence, the current pension system encourages working people to become investors.

Social security remains the most important pillar of retirement for most Americans and is the only support for many. Fortunately, it doesn’t require investment insight. If you work and pay taxes, you are entitled to social security. This pillar is what I expect, but there is no guarantee that its future will depend on Congress.

I think it will happen because it was politically impossible in the past to reduce the profits of retirees. But even if Congress somehow fails to strengthen social security, enough money will come into the system to pay about 80 percent of the currently promised profits. This is an issue that everyone wants to pay attention to.

However, if you can work for a company with a defined contribution plan, try using it. The money invested in these accounts can supplement your social security income one day.

I asked Alicia H. ManelDirector Boston University Retirement Research CenterWhat she recommended.

“At least if you have a company-wide match, put in the amount you can get it,” she said. “Don’t leave money on the table.”

In other words, she said, if the company adds money to your account based on your donations, you invest as much as you need to make a full profit. Company matches often stop at 6 percent of your salary. The company may donate 25 percent or 50 percent of the amount you put in. Be sure to take advantage of it, whatever it is.

Target date fund

The default option for many workplace retirement accounts is a target date fund, which is intended as a set and forgotten investment that can be maintained for years.

Specify a year in which you may retire (for example, 2070 if you are starting to work now). The rest will be done by the fund. It will probably put your money into stock almost completely in the first place and gradually shift your asset allocation to a larger percentage of bonds as you approach retirement.

Professor Munnell said that most target day funds are worth it, according to her estimates. “Make sure you join,” she said. “This automatic save is the only way for most people to save.”

If you can manage it, do some research. Check what’s inside the target date plan. Often, what you find is a variety of great index funds.The cost measured as what is known as the cost ratio low — That is, it is close to zero.

Target date funds work best within your tax shelter account, including IRA. Not used for accounts without a tax shelter. As I wrote, Vanguard’s Target Date Fund, and the funds of several other companies, have created oversized tax invoices for many unprotected investors.upon Thursday, Vanguard has reached a $ 6.25 million settlement with Massachusetts, where he has reimbursed investors and is facing a class action filed in Pennsylvania.

Therefore, for target day funds, stick to your tax shelter account. Use a wide range of equity and fixed income index funds as core investments elsewhere.

goal

How much do you need to save? This is a personal matter. If you need money to pay the bill, do it first. If necessary, postpone the save until you run it later.

But setting goals is a good thing, and it’s best to start early.

Set aside whatever you can manage. If you are in your twenties, Professor Mannell suggested aiming for a total salary of 10 percent. It should put you in good shape decades from now. If you regularly contribute to your workplace planning, this 10% can include the money your employer is investing.

She said you would be in a better financial position if you plan to work until at least 70 years old. It will allow you to receive the maximum social security benefits in a day.

More than that is a bonus.

If you start now, you don’t have to make a big contribution later.

This is a lot of information to capture, so at first simply keep investing, and probably always.

I summarize it all this way: Ignore market news, invest in stocks on a regular basis, and finally invest in bonds through cheap index funds. Take advantage of tax deductions and employer contributions available at work.

If you have any questions, we are here.