Many of the rules for beginning stock-market investors apply no matter how the market is doing, but some are especially important if you dip your toe in during a bear market. The most important thing to keep in mind is that bear markets are not uncommon — they tend to happen every three to five years — and they don’t last forever. Historically, the stock market has always come roaring back, although the full rebound might take anywhere from a few months to several years.
If you are new to stock investing, here are five steps you should take before putting your money into a bear market.
List Your Goals
Before buying stocks in a bear market (or any market), figure out what you want to accomplish. Many new investors wade into stocks to diversify their holdings, with an eye on long-term rather than short-term returns. That’s a good strategy in a bear market, because only seasoned investors have the know-how to achieve short-term gains when there is so much uncertainty.
If your goal is to get rich quick, don’t buy stocks during a bear market. If your goal is to save for retirement, bear markets provide a good opportunity to find stocks at deflated prices and then wait for them to rise again.
Set a Budget
This is essentially the amount of money you can afford to lose in the stock market without jeopardizing your financial health or cramping your ability to pay bills and build savings. You don’t want to put money into stocks that might be needed elsewhere — especially in a bear market, when your mindset should be on long-term investing.
Make a Watch List of Stocks
As Motley Fool noted, a watch list should include excellent stocks that are available at bargain-bin prices. This will require researching stocks and learning how to value them. In a bear market, you should be eyeing companies with strong balance sheets, manageable debt and steady earnings growth. These kinds of stocks tend to do well over the long term. Shy away from volatile stocks with a lot of debt, uneven financial results and unproven markets or technologies.
Determine an Investing Strategy
There are two basic types of stock investors: active and passive. Deciding which you want to be depends on factors such as your financial goals, time horizon, risk tolerance and tax bracket, Business Insider reported. Passive investors tend to take a buy-and-hold approach, preferring to sit back and let stocks grow over time. Active investors buy and sell frequently based on market conditions. Bear markets typically reward passive rather than active investors because it might take years for stocks to rise back up to a level where you want to sell them.
Look Into Index Funds
An index fund is a type of mutual fund that buys all or a representative sample of securities in a specific index, such as the S&P 500. Instead of being actively managed by fund managers, index funds are passively managed, which helps lower fees and expenses. This is a good option for beginning investors in a bear market because it is a comparatively cheap way to buy stocks and bonds, and it gives you exposure to all types of assets.
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