(NYTIMES) – I wouldn’t wish this bear market on anyone.
A lot of people have been losing a lot of money – not just billionaires, but also ordinary working people who have been salting away savings for years.
It will be even worse for those who lose their jobs in a recession, which could easily happen as the US Federal Reserve tries to wring inflation out of the economy.
This is, in short, a rough moment for the economy and the markets, and may seem to be the wrong time to put fresh money into the stock market. Yet that is exactly what I’m suggesting, not just for people like me who have become accustomed to buying shares steadily over many years, but also for those who are just starting out and are likely to have decades of investing ahead of them.
In fact, when you are young, investing during a bear market can be great for your future wealth, and, perhaps, your eventual retirement.
This may seem counter-intuitive but the logic is simple. Buying low and selling high is the core of successful investing. If you invest when stock prices are falling, yet have considerable time for a rebound, you are likely to prosper.
What’s more, if you do this repeatedly over many market cycles, the benefits of compound returns will kick in. You will be earning money on top of the gains of previous years.
Invest this way and you can accumulate a remarkable nest egg.
Here are my proposed steps for getting started at a time like this:
- Pay your bills first, and set aside enough money for an emergency before putting any money at risk.
- Buy stocks – and, when it’s right for you, bonds – using cheap, diversified index funds that track the entire market.
- Treat investing as a marathon with a 10-year horizon at a minimum and, preferably, with a much longer goal.
- Benefit from the market’s ups and downs through what is known as dollar-cost averaging.
Early price declines help
Dollar-cost averaging entails putting money into the market regardless of whether stocks and bonds rise or fall. Your average cost will drop during a bear market, and this will bolster your long-term returns.
If you do this deliberately and understand the benefits of buying shares when they are cheap, you may be able to avoid the terrible feeling that other people have during market declines.
Consider what would have happened if you had started to invest in the first commercially available stock index fund, the Vanguard 500 stock index fund, in July 1980. You would have experienced a nasty bear market that began in November 1980 and lasted until mid-August 1982. The S&P 500 index lost 27.1 per cent in that stretch. You might have been tempted to sell all your shares and forget about stock investing entirely.
But suppose that you had stuck with it, not only through that bear market but through the six others that followed over the next 40 years, including this one.
According to FactSet, your initial investment would have grown 6,600 per cent, including reinvested dividends. And if you had funnelled money from your pay cheque into the market throughout those years and resisted the impulse to sell, your money would have grown splendidly.
source https://netdace.com/latest-news/tips-for-investing-in-a-downturn/