Photo: Tambako the Jaguar
She’s up. She’s down. And according to many industry experts, she’s spiraling into a bear market, or what many would call an ongoing decline in stock prices of 20% or more.
We’re talking about the stock market, of course. And if you’ve been paying attention to your retirement or brokerage accounts at all, you’re probably already painfully aware of emerging trends. According to Bloomberg, recent stock market antics look strikingly similar to periods leading up to the last two bear markets.
Notes Bloomberg: “The Standard & Poor’s 500 Index has seen its average price over 12 months fall for two straight months, data compiled by Bloomberg and MKM Partners LLC show. In the past two decades, declines in the average measure lasting two months or longer had only occurred twice, in the dot-com crash and the 2007-2009 bear market.”
A Lesson on Not Timing the Market
As we all know, people lost enormous sums of money during the last two bear markets and the periods that followed.
Wait — let me rephrase that: People who sold their investments at the bottom of the market lost a lot of money. Meanwhile, many who held onto their investments and rode the wave clawed back all of their earnings and then some.
That’s a generalization, of course, since individual investors’ results don’t always jibe with national trends. But it’s safe to say that’s how the results panned out for many people.
Take the popular Vanguard Total Stock Market Index Fund (VTSAX), for example. A sum of $10,000 invested in 2005 was worth only $6,512 in late 2008, yet ballooned to $20,609.31 as of this writing. Imagine being the sucker who sold his shares in 2008 and took that loss, knowing now he would have earned it back and then some if he had just waited?
Should You Keep Investing in a Bear Market?
While selling in a panic locks in your losses, there are other ways a bear market can cost you. According to New York City financial planner Shannon McLay of The Financial Gym, one way people lose money during a bear market is when they stop investing altogether — either out of fear, confusion, or because they just don’t know what to do.
The bottom line: People see falling prices and their intuition tells them to stop buying. But that can be a huge mistake, says McLay.
“No one really knows how long any market cycle will last,” she says. “And if you stay on the sidelines, you run the risk of the market experiencing a huge rally that you will not get to take advantage of because you weren’t buying all along.”
We all wish we had a crystal ball, laments McLay. “But since we don’t, it’s best to commit to participating in the markets year-round and know that commitment will pay off over time.”
Dollar Cost Averaging, FTW
Investing the same amount of money into certain investments on a regular basis is commonly referred to as “dollar-cost averaging.” By investing a consistent amount of money in any kind of market — whether you truly feel like it or not — you may be able to grasp the best average returns over time and even out fluctuations.
The strategy goes like this: If you consistently invest, say, $100 a week, you’ll automatically buy fewer shares at high prices and more shares when they’re at a discount. For example, if a stock or fund’s price falls to $50 one week, you’ll buy two shares; if it rises to $100 the next week, you’ll only buy one share.
“This is a great strategy because it can be automated and it saves you from attempting to time the market,” notes Katie Brewer, Certified Financial Planner and owner of Your Richest Life Planning.
Brewer also notes that individuals who do the bulk of their investing through their work-sponsored retirement accounts are already dollar-cost averaging by default.
“When you put money into a 401(k) or an investment account on an automated basis, you are already dollar-cost averaging,” says Brewer.
And if you’re mostly invested in mutual funds, investing automatically every month is an even easier decision.
Since mutual funds charge the same expense ratio as a percentage on each investment no matter how great or small, you’ll pay the same amount of fees no matter how often you invest your money. Investing in individual stocks, on the other hand, usually means paying a commission or fee for each purchase or trade.
These opposing fee structures could make dollar cost averaging with mutual funds an especially good investment, which is something to consider.
Bear Markets: Stock Sales in Disguise
When the stock market rallies, we all feel rich and merry. But when it tanks, many want to cut their losses and move on. That’s another rookie blunder, says McLay. When prices drop, she suggests thinking of it as more of a sale than a death knell.
“Bear markets give investors a great opportunity to buy stocks that are on sale,” says McLay. “Yes, you run the risk of the stock price going down after you buy it; however, if it’s something you want to own over a longer period of time, the temporary setback shouldn’t concern you.”
We’ve all heard it a million times: When it comes to investing, we’re supposed to “buy low and sell high.” On the same vein, many suggest using those low points as opportunities to stock up.
The Bottom Line
Should you continue investing in a bear market? At the end of the day, the choice is yours. But for many disciplined investors, the choice to continue investing through a bear market and beyond is an easy one. Because the ups and downs don’t matter nearly as much as average returns over time.
And on the advice of famous investor Warren Buffett, they know that consistency often pays off — but that following the herd usually doesn’t.
“Be fearful when others are greedy, and greedy when others are fearful.” — Warren Buffett
Do you invest every month no matter what? Are you afraid to continue investing in a bear market?
The post Should You Continue Investing in a Bear Market? appeared first on The Simple Dollar.
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