How to Start Investing in a Bear Market

The financial market party is over. The chat about hotstock, cryptocurrencies and the great opportunities for NFTs ended in a whisper. Recession and the bear market are big buzzwords these days.

Obviously, this is not the happiest time for investors. If you haven’t invested money in the market before, this may not seem like the most obvious time to get started.

However, there are benefits to investing in the bear market. As stocks fall and day traders give up, most stocks aren’t making a profit, so they’re less likely to be in fashion. Instead, you can focus on the essential goal of increasing wealth in the long run.

Most of my columns are aimed at people who are already involved in investing in stocks and bonds to some extent using investment trusts and exchange-traded funds. But this column is a little different. It’s mainly written for those who are still in school, or who are just starting out in the workforce, or who come to salt their money for the future.

For people like Lucy Neil who graduated this month North Central High School “I just finished my AP macroeconomics class and I feel like I don’t know what to do to ensure my financial security,” he wrote in Indianapolis.

In a telephone conversation, Neil said it would be helpful to have basic and reliable information on how to start and stick to an investment. So here is a brief summary. It may be useful for beginners, but it is mainly aimed at beginners. If you have any other specific questions, please write them down. I will answer.

Basics

This year’s market decline shows how easy it is to lose money with caution.

Still, the investment can be rewarding. Start early, focus on the long term, and follow a few simple steps. I will explain this.

• Before you endanger your money, pay your invoice first and save in case of an emergency.

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

• Think of your investment as a marathon, not a sprint, with a period of at least 10 years and preferably with a much longer goal in mind.

First, pay your bill, and save some savings

Investing involves risk taking. While these risks can be minimized, they cannot be completely avoided, especially when investing in the stock market.

Therefore, make sure you can pay the invoice before taking any additional risk. Then try salting enough cash in case of an emergency.

Reduce your spending a little, save a little more and do it regularly. Soon you will have a nice nest egg. Please keep it in a safe place.

For short-term savings, a bank account or money market fund makes sense because your money is safe and you can get it quickly.You can find money market funds in major companies like Vanguard, Fidelity, T. Low Price Also Schwab.. Interest rates are low, but rising.

For long-term safe savings, try I-bonds issued by Ministry of Finance You are paying 9.62% interest (interest rates are reset every 6 months), a bank certificate of deposits, and a high-yielding savings account.

Buy stocks, not crypto

Now you are ready to invest.

I invest my investment dollars only in widely diversified funds that hold stocks and bonds. It’s something I recommend to those who started. Equities and fixed income are two major asset classes and require nothing else. Funds, especially index funds that track the market, are a great and cheap way to buy stocks and bonds. (What does it mean to be cheap? Generally, you pay a much lower fee than what is known as an active fund.)

Consider this before moving on: As an investor, I don’t put in any money Directly For cryptocurrencies, NFTs, gold or wheat, other commodities or other things. You don’t need them in your investment portfolio and will take extra risk if you buy them.

In addition, if you invest in the entire stock market through an index fund, you are exposed to these things anyway because you own some of the companies that engage, trade, or provide services to them.To do that CoinbaseA platform that enables trading of cryptocurrencies, and PayPalOwns, Venmo Then encourage the customer to buy the cipher. It would be great if these and other companies could make money through cryptocurrencies. You will do so too. Otherwise, the loss will be offset by other equity investments.

That is the meaning of diversification. Buying the entire market can minimize the impact of a small part of the market, for better or for worse.

Now, about equities and bonds: If I had a great luxury of youth and decades ahead to recoup possible losses, I would focus on equities. In fact, despite the pain of the bear market, even if I understand what I know now, if I’m in my teens or twenties, I’ll invest 100% in stocks.

But there is no such luxury. I’m closer to retirement than my first job, so I own a fair amount of bonds. It’s generally more stable than stocks and puts you to sleep at night. But like Mr. Neil, if I’m 18, the bonds aren’t what I buy. That’s because stocks return almost twice as much money as bonds in the long run. According to calculations, the annual rate for stocks is 12.3%, compared to 6.3% for bonds.To Vanguard Percentage of market returns from 1926 to 2021.

How about the loss?

The bear market is on Neil’s radar. “We continue to see the stock market at record lows,” she said in a telephone conversation on her Tuesday. “But is that a good time to buy stock?”

My answer was ambiguous.

Yes, if you are really interested in it in the long run, it’s a great opportunity to buy stocks. Being in the bear market, prices are much better for buyers than they were at the beginning of the year. That is, the stock market as a whole has fallen by at least 20% from its peak. The past has not guaranteed anything about the future, but in fact the US stock market has consistently recovered from a decline for at least 20 years. If you plan to buy or sell stock for more than 20 years, buy it now.

But no, if you’re trying to make money right away, it may not be a good time. So far this year, stock market trends have been negative. You can lose money quickly. Then again, the market will start to rise tomorrow and may continue to rise for a long time. I don’t think it will happen soon, but no one really knows.

In short, understand the risks you are taking. Do not buy stock unless you are ready to withstand “paper losses” in the short term and can deposit money in the market for a long period of time. And think about why you buy stocks in the first place.

Stock index fund

Why is equity investing such an effective way to make money in the long run?

The answer may not be clear. The number of “meme stocks” like GameStop and AMC soared last year, not because it was a solid investment, but mainly because many people continued to buy them. Over months, and sometimes years, this type of herd behavior (what economist Robert J. Schiller calls “irrational enthusiasm”) can raise prices and bring significant benefits.

However, if you rely on the emotions of strangers to set prices, you can lose a lot of money when the market goes down, as it is these days.

Neil, an economics student, came up with what I thought was a good answer. Equities bring long-term profits to shareholders as the economy grows in the long run and companies in the stock market come together to profit. Those growing profits come to shareholders. And that’s what you are essentially as a stock investor, or shareholder, even if you own only a small portion of the company through an index fund.

Over a very long period of time, its growth was extraordinary. An annual 12.3% return on the stock market means that, on average, your money has doubled over and over again over decades within six years.

Please note that we are not talking about choosing a particular stock. Which companies will succeed and which will fail? Which stocks will perform better this year or next? It’s hard to know.

Similarly, no one knows where the stock market is heading daily or yearly. In December, the majority of Wall Street predictors said the stock market would rise in 2022. They made a mistake.

It doesn’t matter if you want to invest in the entire market in the long run and invest in money regardless of short-term movements in the market. This approach is very simple. You can use one index fund to capture the entire United States. Stock market, or global stock market. Compare so-called expense ratios and find an index fund with low fees. Let’s shop and find out.

Keep your investment as simple and cheap as possible. “By investing, you can get what you don’t pay for,” said John C. Bogle, founder of Vanguard and founder of the first commercial index fund. increase.

Don’t put yourself in a place where a short-term decline in market or individual stock fortunes can really hurt you. Instead, set up a solid, diverse and cheap index fund that puts you in a great position to thrive from economic growth in the long run.