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Bear Market Investing: How to Get Started

Our columnist says you can prosper in the long run by investing in low-cost funds that track the entire market.

Financial markets are long overdue for a party. Hot stocks and cryptocurrencies and NFTs have been whispered about for a while now. There is a lot of buzz these days about recessions and bear markets.

It is clear that investors are not in the happiest of times at the moment. This may not seem like the best time to begin investing if you have never done so before.

However, investing in a bear market has its advantages. You are less likely to be swept away by fads because stocks have fallen in value and day traders have given up. Rather than focusing on short-term gains, you should aim for long-term wealth growth.

Most of my columns target investors who already use mutual funds or exchange-traded funds for stock and bond investments. It’s a little different this time around. Those still in school, newly employed, or just getting a head start on saving for the future will find it particularly useful.

In a note she sent, Lucy Neal, an Indianapolis high school graduate who just completed AP Macroeconomics, said, “I feel like there isn’t a clue as to how to ensure my own financial security.” I hope this information can help.

She mentioned that she would find it useful to have basic, trustworthy information for starting and sticking with investing. Let’s take a quick look at what’s going on. You may find it useful even if you are a veteran, but it is primarily intended for beginners. Feel free to write in with any other questions you may have. I will do my best to answer them.

Photo by Markus Spiske on Unsplash

What you need to know

Even careful investors can lose money during this year’s market decline.

You can still reap rewards from investing if you start early, focus on the long term and follow some simple steps, which I will explain below.

  • Put your money at risk only after you have paid your bills and saved for emergencies.
  • Use cheap, diversified index funds that track the entire market to buy stocks and bonds when the time is right.
  • Keep in mind that investing should be viewed as a marathon, not a sprint, aiming for at least a 10-year horizon and, ideally, for much, much, much longer.

Set aside some savings after paying your bills

Risk is a part of investing. When you put money into the stock market, you can minimize these risks, but you cannot avoid them entirely.

Please ensure that you are able to pay your bills before taking any additional risks. After that, make sure you have enough cash on hand in case of an emergency.

Make regular savings and spend less. Your nest egg will grow soon. Make sure it’s safe.

If you want to save money for a short period of time, a bank account or money market fund is the best choice, because your money will be safe and you’ll have access to it rapidly. Vanguard, Fidelity, T. Rowe Price and Schwab are some of the major companies where you can find money market funds. Interest rates are low, but they are rising.

A high-yield savings account or a bank certificate of deposit are good options if you want to save for a longer period of time. There are also I bonds, issued by the Treasury Department, that pay 9.62 percent interest (the rate is reset every six months).

Invest in stocks instead of cryptocurrencies

You’re ready to invest now.

My own investments go into broadly diversified funds that hold stocks and bonds, and I recommend the same to anyone just starting out. It’s only necessary to invest in stocks and bonds. A great way to buy stocks and bonds is through funds — specifically, index funds that track the market. If you invest in an actively managed fund, you will generally pay much higher fees than if you invest in a cheap mutual fund.

Here’s something you need to consider before moving on: As an investor, I wouldn’t put my money directly into cryptocurrency, NFTs, gold, wheat, or any other commodity. Buying them will add extra risk to your portfolio and you don’t need them.

You will also be exposed to these things anyway if you invest in the entire stock market through index funds since you own shares of the companies that engage, trade, and service them. Among them is Coinbase, which allows cryptocurrency trading, and PayPal, which owns Venmo, which encourages customers to buy cryptocurrencies. Great; you’ll also profit from crypto if these companies or others succeed. In the event they don’t, other investments will offset the losses.

That’s what diversification is all about. Any small part of a market won’t have much impact if you buy the whole market.

If I had the great luxury of youth, I would focus on stocks if I had decades to recoup any losses. If I were in my teens or 20s, understanding what I know now, I would invest 100 percent in stocks despite the pain of the bear market.

The luxury of being able to do that is not available to me. The fact that I’m getting closer to retirement than the day I started my first job means I own a good deal of bonds, which are generally more stable than stocks and let me sleep at night. The Vanguard analysis of market returns from 1926 to 2021 found that stocks return almost twice as much as bonds over the long run: 12.3 percent, annualized, for stocks versus 6.3 percent for bonds.

Losses, what about them?

Ms. Neal is watching the bear market closely. In a phone conversation on Tuesday, she said, “I keep seeing record lows for the stock market.” Isn’t that good news?”

I answered equivocally.

Stocks are a great investment if you are investing for the long term. We’re in a bear market, which means that the stock market as a whole has fallen at least 20 percent from its peak, so prices are much better for buyers now than at the beginning of the year. There is no guarantee that the future will be any different from the past, but the American stock market has always recovered from declines over stretches of at least twenty years. Buy now if you intend to hold stocks for at least 20 years.

In any case, if you are looking to make money quickly, this may not be a good time. Stocks have been declining since the beginning of the year. There is a possibility of losing money right away. It is also possible for the market to start rising tomorrow and continue trending upward for a long time. No one knows for sure, but I don’t think it’s going to happen.

Know what you’re taking on. Invest in stocks only if you can tolerate “paper losses” in the short term and keep your money in the market for the long run. Consider your reasons for buying stocks.

Index funds invest in stocks

What makes stock investing such a successful long-term investment?

You may not be able to figure out the answer right away. In the past year, “meme stocks” like GameStop and AMC have grown dramatically, not because they are great investments, but rather because there is an expectation that they will grow. As a result of this kind of herd behavior — known as “irrational exuberance” by economist Robert J. Shiller — prices can increase over months and sometimes even years.

As the market has fallen lately, you can also lose a lot of money if you rely on the emotions of strangers to set your prices.

Taking into account the economy’s long-term growth and the companies’ profits, I think Ms. Neal’s answer is something I would agree with: stocks provide long-term returns to shareholders. Profits accrue to shareholders as a result of those growing profits. Stock investors are essentially shareholders, even if they own only a tiny slice of a company.

This growth has been extraordinary for long periods of time. Over decades, your money would have doubled on average in less than six years, based on the 12.3 percent annualized return from the stock market.

There is no mention of picking a particular stock here. How will companies fare in the future? Do you think this year’s or next year’s stocks will perform better? There is no way to tell.

As with the stock market, no one knows where it is going from day to day or year to year. The stock market is forecast to rise in 2022 by the vast majority of Wall Street forecasters. My bad. They made a mistake.

The short-term movements of the market are not important if you invest in the whole market for the long haul. There is nothing complicated about this approach. With just one index fund, you can invest in the entire U.S. stock market or even the entire world stock market. Compare the expense ratio of index funds to find those with low fees. Do your research, shop around.

Investing should be as simple and cheap as possible. “In investing, you get what you don’t pay for,” said John C. Bogle, founder of Vanguard and the creator of the first commercially available index fund.

Put yourself in no position to suffer from short-term declines in the stock market or individual stocks. Put yourself in a great position to prosper over the long term by investing in diversified, inexpensive index funds.

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