Plenty of investors feel scared and uncertain as the S&P 500 enters its second bear market in 2.5 years. So far, the S&P 500 has lost about 21% of its value during this bear market. And it doesn’t look like that will end anytime soon.
What can you do when the stock market trends downward?
Most importantly, follow the golden rule: time in the market trumps timing the market. So, don’t pull all of your money out of your investments as you risk missing out on the next bull market. Instead, you can focus on strategies that help protect your money and position your investment portfolio for long-term growth.
Dedicate More Money to Retirement Accounts
With retirement, you are playing the long game. If you haven’t maxed out contributions to 401(k) and IRA accounts, increasing the monthly amount you dedicate to them is a smart play when markets have fallen because it lowers your overall cost basis.
Investment accounts for retirement offer several benefits that can help you to grow your money faster during a bear market. For example, many employers will match a percentage of your 401(k) contribution. Increasing the amount you invest now could mean you get more money from your employer. Review your benefits package to get specifics that will help you maximize matching contributions.
Other benefits you can get from retirement accounts include:
- Lowering your tax burden for this year by contributing to a traditional IRA.
- Avoiding taxes on investment gains by investing in a Roth IRA.
- Compound growth that can turn small contributions into large returns.
If you don’t have an investment account intended to fund your retirement, compare your options to determine which one fits your financial goals best.
Set Up Automatic Contributions to an Index Fund
Investing during a bear market feels scary because you don’t want to buy stocks that will lose value but timing the market well on a consistent basis is nearly impossible. Hours of research can help you make more informed decisions, but you can never know how a stock will perform.
Setting up automatic contributions to an index fund lets you take advantage of fluctuations in the market without forcing you to think too hard about your options. Automatic contributions to an index fund commit you to buy even when you might feel reluctant.
Sure, losing a little control can feel scary, but it creates more opportunities for your money to grow from fluctuations in the market. Just make sure you choose an amount of money you don’t need as part of an emergency fund anytime soon.
Investing in index funds also minimizes your risk. An index fund spreads your investment across dozens, hundreds, or thousands of companies. If you put all of your money in one stock and that company fails, you will lose your whole investment. When you invest in an index fund, you lower your risk by investing in a broad range of companies. Some will probably perform poorly, but others will make money to balance your portfolio and protect you from loss.
Buy Fewer Stocks More Frequently
If you would rather buy stocks directly instead of investing in an index fund, consider buying fewer stocks more frequently. For example, you might invest $250 per week instead of investing $1,000 once per month.
This approach gives you a similar benefit as setting up automatic index fund contributions. Since you can’t know how a stock will behave, you buy a small number of shares more often and focus on the average. You might buy ten shares for $100 this week. Next week, ten shares might cost $90. When you take the average of these two weeks, you can see that you spent $9.50 per share.
From this perspective, you avoid the peaks and valleys that add to the risk of investing. You might not benefit as much from “buying low and selling high,” but you also avoid the damage caused when you “buy high and sell low.”
Confronting the Bear Market
It’s worth remembering that the current bear market is only down in relation to nearly two years of expansive growth. Investing isn’t nearly as scary when you consider that the market has historically always recovered from downturns. The recent dip creates an opportunity for you to buy stocks at discounted prices. If they recover, you stand to earn a profit.
Now is a critical time for investors to reconsider their goals, research companies to find high-quality investment opportunities, and put money into accounts that offer tax benefits. You can’t control how the market behaves, but you maintain full control over how you use your money.