How to start investing in a bear market

The party in the financial markets is long over. Talk of hot promotions and incredible opportunities in cryptocurrencies and NFTs has subsided to a whisper. Recession and bear market are big buzzwords these days.

Obviously, these are not the happiest times for investors. If you have never invested in the market before, this may not seem like the most obvious time to start.

However, there are benefits to investing in a bear market. When stocks drop in price and day traders give up, you are less likely to succumb to fads because almost none of them are profitable. Instead, you can focus on the main goal of increasing your wealth in the long run.

Most of my columns are aimed at people who already have something to do with investing in stocks and bonds, often using mutual funds or exchange-traded funds. But this column is a little different. It is written mainly for people who are still in school, or just starting to work, or just starting to save money for the future.

This is for people like Lucy Neal, who graduated this month North Central High School in Indianapolis and wrote in a note: “I feel like I have no idea what to do to ensure my financial security (even though I just completed an AP macroeconomics course!”).

In a phone call, Ms. Neal said it would be helpful to have basic solid information on how to start investing and stick with it. So here’s the summary. This can be useful even if you are an experienced user in this business, but it is intended mainly for beginners. If you have other, specific questions, write, I will try to answer them.

The fall in the market this year shows how easy it is to lose money even if you are careful.

However, investing can be rewarding if you start early, focus on the long term, and follow a few simple steps that I will explain.

  • Pay bills first and save for emergencies before risking money.

  • Buy stocks – and when it suits you, bonds – using cheap, diversified index funds that track the entire market.

  • Think of investing like a marathon, not a sprint, with a horizon of at least 10 years and preferably a much longer term goal.

Investing involves risk. You can minimize these risks, but it is impossible to bypass them completely, especially when you invest in the stock market.

So before you take any additional risk, make sure you can pay your bills. After that, try to save enough money for an emergency.

Spend a little less, save a little more, and do it regularly. Soon you will have a good stash. Keep it in a safe place.

For short-term savings, it makes sense to have a bank account or a money market fund because your money will be safe and you can get hold of it quickly. You can find money market funds in large companies such as Vanguard, Loyalty, T. Rowe Price or Schwab. Interest rates are low but rising.

For longer-term, secure savings, try I bonds, which are issued Treasury Department and pay 9.62% per annum (the rate is reset every six months), bank certificates of deposit and high-yield savings accounts.

Now you are ready to invest.

I only invest my own investment dollars in broadly diversified funds that hold stocks and bonds, which is what I recommend to anyone starting out. Stocks and bonds are the two main asset classes and you don’t need anything else. Funds – in particular index funds that track the market – are a great and cheap way to buy stocks and bonds. (What do I mean by cheap? As a rule, you pay much less fees than in a so-called actively managed fund.)

Before you go any further, consider this: As an investor, I wouldn’t invest at all. directly into cryptocurrencies, NFTs, gold or wheat, other commodities or whatever. You don’t need them in your investment portfolio and you will be taking on additional risk if you buy them.

Moreover, if you invest in the entire stock market through index funds, you will still run into these things because you will own parts of the companies that raise, trade or service them. This includes Coinbasea platform that allows you to trade cryptocurrencies, and PayPalwho owns Venmo and encourages customers to buy cryptocurrencies. If these or other companies manage to capitalize on cryptocurrencies, great; you will too. If they don’t, the losses will be offset by other equity investments.

That’s what diversification means. Buy the entire market and you minimize the impact, for better or worse, of any small part of it.

Now about stocks and bonds: if I had the great luxury of youth, and I had decades to recoup possible losses, I would focus on stocks. In fact, despite the pain of the bear market, understanding what I know now, I would have invested 100 percent in stocks if I was a teenager or 20 years old.

But I don’t have that luxury. I’m closer to retirement than my first job, so I have quite a few bonds, which tend to be more stable than stocks and keep me awake at night. But bonds are not what I would buy if I were 18, like Ms. Neil, because stock returns almost double the long-term return on bonds: 12.3 percent year-on-year for equities versus 6. 3 percent for bonds, as calculated. on Vanguard market returns from 1926 to 2021.

The bear market is on Miss Neal’s radar. “I continue to see the stock market at an all-time low,” she said in a phone call on Tuesday. “Does this mean that now is a good time to buy stocks?”

My answer was ambiguous.

Yes, this is a great time to buy stocks if you are really into the long term. Prices for buyers are much better than they were at the beginning of the year because we are in a bear market, which simply means that the stock market as a whole is down at least 20 percent from its peak. While the past is no guarantee of the future, the fact is that the US stock market has always bounced back from recessions for at least 20 years. If you can plan to buy and own shares for 20 years or more, by all means buy now.

But no, this might not be the right time if you are trying to make money fast. The trend in the stock market so far this year has been negative. You can immediately lose money. On the other hand, the market may start rising tomorrow and continue to rise for a long time. I don’t think it will happen, but no one knows for sure.

In short, be aware of the risks you are taking. Don’t buy stocks unless you’re willing to take “paper losses” in the short term and can’t keep your money in the market for the long haul. And think about why you’re buying shares in the first place.

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

The answer may not be obvious. A group of “meme stocks” like GameStop and AMC surged last year, not because they were sound investments, but mainly because a lot of people wanted them to grow and keep buying. Over the course of months, sometimes years, this herding behavior—what the economist Robert J. Shiller calls “irrational exuberance”—can inflate prices and earn you handsome profits.

But if you rely on the emotions of strangers to set prices for you, you can also lose a lot of money when the market drops, as it has been doing lately.

Ms. Neil, an economics student, gave what I think is a good answer: stocks provide long-term returns to shareholders because the economy grows in the long run and companies in the stock market, taken together, make a profit. These rising profits go to shareholders. And that’s who you are, essentially, as an equity investor—a shareholder—even if you only own a tiny fraction of the company through an index fund.

Over very long periods this growth has been extraordinary. A stock market annual return of 12.3% means that, on average, your money would double in less than six years, over and over again, over many decades.

Please note that we are not talking about picking any specific stocks. Which companies will thrive and which will fail? Which stocks will perform better this year or next? It’s hard to understand.

Similarly, no one knows where the stock market is heading from day to day or from year to year. In December, the vast majority of Wall Street forecasters said the stock market would rise in 2022. Oops. They were wrong.

None of this matters if you are investing in the entire market for the long term, investing money regardless of short term market movements. This approach is incredibly simple. You can only use one ETF to take over the entire US. the stock market or even the entire global stock market. Look for an index fund with low fees by comparing what’s called an expense ratio. Go shopping, do your research.

Make your investment as simple and cheap as possible. As John C. Bogle, founder of Vanguard and creator of the first commercially available index fund, put it, “When you invest, you get what you don’t pay for.”

Don’t put yourself in a position where short-term downturns in the market or individual stocks can really hurt you. Instead, build yourself solid, diversified, low-cost index funds and you’ll be in a great position to thrive on economic growth in the long run.

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