Many people are considering investing in stocks during the bear market. Whether you didn’t have the funds previously or you simply can’t resist the relatively low prices right now, investing in stocks can be a good hedge against inflation.
“The definition of a bear market is when a market experiences prolonged price declines, typically falling 20% below their recent highs,” John L. Savarino, an investment advisor representative at Rooted Wealth Advisors, explained. “This makes for a good time to begin investing because you can look at it from a perspective that securities are at a discounted price. The market is cyclical, so if you begin investing when the market is setting record highs, the chances of the market declining eventually are very high.”
If you can manage the stress of watching your balances fall — on paper — until the market turns around, bear market investing can ultimately pay off when the market turns bullish again. And that will happen. “Patience, consistency, and discipline are necessary when it comes to investing,” Savarino said.
What else should beginning investors know before buying stocks for the first time?
Read, Learn and Understand
“Investing does not need to be complicated, but you do need to take the time to learn,” said Jay Zigmont, Ph.D, CHP and the founder of Childfree Wealth. He recommended reading as much as you can on the topic, including classics like “The Little Common Sense Book on Investing,” “The Simple Path to Wealth” and “A Random Walk Down Wall Street.”
Zigmont also echoed the advice of Warren Buffett to never invest in a business you cannot understand. He said, “Follow the general rule of only investing in things you understand. Understanding an investment includes knowing what you are investing in, how it impacts your financial plan and where to hold it.”
Get Expert Help
Don’t be afraid to ask for help navigating the investment landscape, experts agree. Zigmont suggested looking for an advice-only, fee-only fiduciary certified financial planner.
Catherine Valega, CFP, CAIA and wealth consultant at Green Bee Advisory, said, “The fee you pay for an advisor to help with your overall plan is more than recouped based on how we can help you invest for growth, protect your assets and reduce taxes.”
When you’re choosing a financial advisor, look for one that’s willing to help you grow your wealth in the long term, no matter how little you’re starting out with, advised Andrew Gold, a financial advisor and investment strategist at Prestige Wealth Management. “If they won’t work with you now, you probably don’t want to work with them later when you have the extra money,” he said.
Know and Accept Your Risk Tolerance
Before you put a dime into the stock market, you’ll want to understand your own risk tolerance.
Heather Winston, CFP and director of financial planning and advice at Principal Financial, explained, “Risk tolerance is the amount of risk one is willing to take, and it will remain reasonably static throughout your lifetime. That said, risk tolerance is only one component of investing — it’s also important to apply that tolerance to your timeline to meet your goals. Generally, the more time you have, the more risk you can assume because time can help smooth out the market’s gyrations. Conversely, if your time horizon is short, reducing risk can enable you to preserve what you have amassed.”
She noted that it’s normal to feel the pain of losses more significantly than the joy of gains. “This can cloud our decision making,” she said. “One of the most efficient risk-management strategies is simply sticking to your plan. You’re giving yourself time to ride out and recover from periods of volatility and bear market cycles.”
Use Dollar Cost Averaging To Minimize Risk
In a bear market, it might be tempting to try to find the bottom of your favorite stocks and buy at that low point. But you never know a stock’s low point until it begins to climb again. Instead, experts suggest using dollar cost averaging to reduce the risks of short-term volatility.
Gold recommended getting started with exchange-traded funds (ETFs), which are collections of similar stocks “to be able to trickle into the market in a broad basket of companies without committing to the success of one company alone.”
Focus on Building a Diversified Portfolio
Savarino echoed Gold’s sentiments about beginning with broad exposure to the market. “Index funds that track the total stock market are a really good place to start,” he said. “They are usually very low cost and simply track the performance of the stock market instead of taking on the risk of one single company at a time.”
As your portfolio expands, you may feel comfortable investing in larger companies that you like. “But low cost index funds are the best place to start, in my opinion,” Savarino said.
Make Sure Your Other Finances Are in Order
It’s important to remember that the stock market is a long game. “A beginner investor should be buying stock for long-term growth and accumulation,” Savarino said. That means before you begin investing, you’ll want to make sure you have adequate emergency savings in an easy-to-access account.
Experts traditionally recommended having at least six months salary set aside, but Valega said she recently upped that recommendation to 12 to 24 months of expenses saved, based on the possibility of a weak job market in the near future.
The cash you invest, Winston said, “should be money that you have left over after you have established an emergency fund for unforeseen expenses, and after you have reduced or eliminated unmanageable debt obligations.”
Choose a Platform
When you’re ready to get started, you’ll need to choose a platform. Savarino pointed out that most platforms today have no fees to open an account, buy, sell or trade assets. “I think the biggest thing a first-time investor needs to be aware of is what resources the platform offers, preferably at no cost,” he said.
He noted that larger platforms like TD Ameritrade provide a wealth of training resources, material, and personalized, one-on-one help. “Smaller platforms may not offer that,” he said.
Some first-time investors lean toward Robinhood because of the ability to buy fractionals, or a small percentage of an expensive stock. However, Gold warned, “I would steer clear of Robinhood because of the lack of transparency. Also, “during times of volatility, they sometimes shut down, which isn’t good,” he added.
Make Investing Automatic
Gold said that a bear market represents a good time to start investing since most stocks are “20% to 30% off their highs.” But first, you need to get into the habit of setting that money aside for investments.
“Focusing on the behaviors rather than the results will more often lead to success,” he said. “Both saving and investing are important when it comes to getting a head start on your financial future.”
Whether you’re starting to build out your portfolio or just aiming to save for a rainy day, make it automatic, Gold recommended. “Everyone has a transaction size that takes it from a no-brainer swipe of your card to something you’ll want to consider more carefully. That number could be $50, $100 or even $500. Decide what that number is and set up your bank account to have one-quarter of that come out each week when you get paid,” he said.
If you get paid bi-weekly, you’ll want to pull half the amount with each paycheck. “Don’t go into stressing about that money being pulled out of your account. If you can conquer the first couple of months of saving, you will have an easy time transitioning to be a savvy saver and investor in the future,” Gold said.
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