In a bear market, many investments drop in price, like they’re “on sale” for new investors. If you’ve been waiting to invest for the long term, here are some tips to get started.
When you picture investing, the Charging Bull of Wall Street may come to mind, signaling optimism and energy. But what happens when a bear market takes a swipe at your investments, leaving you wanting to take cover?
Uncertainty—even panic—is natural when the market drops. But in periods of economic unease can also lie investment opportunity.
Should you invest in a bear market? Here’s what to consider—and how to get started.
What’s a bear market?
A bear market is a period of stock market declines—when values fall 20% or more from recent highs.
This is generally caused when investors’ confidence gets shaky, and they sell their assets, driving down stock prices.
A bear market is the opposite of a bull market, which is an increase of at least 20% from market lows.
“When the market drops into bearish territory, and it inevitably does, it’s smart to stay focused on quality investments with strong fundamentals” says Heather Winston, a financial professional and head of product strategy for Individual Solutions.
Winston suggests considering strategies like dollar-cost averaging (investing at regular intervals regardless of market conditions) and diversification (spreading your money across different types of investments) to soften the downward momentum.
Before you start buying up stocks, review your current financial situation. Check that:
- You have or are working on an emergency fund, with three to six months of expenses saved in an account that’s liquid and accessible.
- You’ve paid down credit card debt or any other high interest debts or loans.
- You’re contributing to your workplace retirement plan, putting away at least enough to get a company match.
- You’re protecting your income and assets. You have enough life insurance to take care of those you love and disability insurance to help protect your income if you become ill and unable to work.
If you've covered these foundations and you still have money at the end of the month, consider the investment options below.
Keep in mind, Winston says, “in a bear market environment, you may not see immediate returns. In fact, it's more likely that the dollars invested will continue to decline in value.
“This can be emotionally difficult, so use prudent judgment. If the investment isn't something you would consider owning in a bull market, it likely isn't something you should add in a bear market either.”
“If your 401(k) has taken a dip in the bear market, you may be thinking now is the time to sell everything,” Winston says. “But this is one time to not trust your gut.”
In fact, given that most bear markets last less than 14 months, it may be a good time to resist selling your long-term investments.
Instead, if you increase your contributions, you’re giving your dollars a chance to grow when the market rebounds.
If you don’t have access to an employer retirement plan or want to save more for retirement in addition to your 401(k), an individual retirement account (IRA) is a great tool. The more money you invest today, the more you’ll likely have years down the road.
Depending on your needs, you may open a traditional IRA, which allows you to save pre-tax money now and pay taxes on your earnings when you take withdraws in retirement. This may be a good option if you suspect to be in a lower tax bracket in retirement.
Or you may open a Roth IRA, which is funded with post-tax dollars, and you’ll take money out tax-free when you retire.
If you don’t already have one, learn how to open an IRA.
Brokerage accounts can also be a helpful tool in reaching long-term goals.
Like retirement accounts, these allow you to invest for the long term. Earnings could supplement funding your post-working years but could also go toward other life goals like getting married, buying a house, or growing your family.
But unlike retirement accounts, they have no restrictions on how much you can invest, and you can generally take money out at any time without paying fees. (You’ll still typically pay taxes on any capital gains.)
You’ll need to know your risk tolerance—somewhere between conservative (more averse to risk) and aggressive (more tolerant of risk). This can help you select investments and build a portfolio you’re comfortable with, while continuing to work toward your goals.
If you find yourself worrying about whether your portfolio is gaining or losing day to day, you may consider adjusting your risk profile. Matching your risk tolerance to your investment portfolio can help ease your mind during volatile times.
A 529 savings plan allows you to invest money to be used for education expenses such as college, apprenticeship programs, and K-12. This includes tuition, room and board, mandatory fees, and textbooks. You designate how and where it’s spent.
Before opening an account, review the plan’s tax benefits, fees, expenses, and investment options. You can open a 529 plan offered by any state, so shop around for the one that best suits your needs.
If you’re interested in learning about the Principal® 529 plan, visit scholarsedge529.com.
If you’re enrolled in a high deductible health plan (HDHP) through your employer, an HSA offers a triple advantage on federal income taxes: Money put in isn’t taxed, it grows tax-free, and you’re not taxed when you take money out for qualified medical expenses. Plus, you decide how the funds are invested and how you’ll use the money for health care expenses.
To get started, talk to your employer’s human resources department about whether you have access to an HSA or how to increase your contributions.
What’s next?
If you have a retirement account through Principal, log in and consider increasing your contributions. First time logging in? Get started by creating an account.
