On Monday, the S&P 500 index closed in “bear market” territory for the first time since March 2020 and experts say it could be a good thing for new investors. Here’s why…
A so-called “bear market” refers to any time the stock market reaches a decline of 20% or more from recent highs.
On Monday, June 13, 2022, the S&P 500 index closed in “bear market” territory for the first time since March 2020, CNBC reported. The S&P 500 fell more than 21% below its record high in January.
Individual securities or commodities can also be considered in a bear market if they experience a decline of 20% or more over a sustained period of time, typically two months or more, according to Investopedia.
For comparison, oppositely, a bull market is one in which prices are rising or are expected to rise. The most commonly accepted definition is when stock prices rise by 20% after two declines of 20% each.
Many investors see a “bear market” as an omen that something calamitous, namely that a recession could be about to occur.
In such an economic environment, Wall Street becomes spooked that the Federal Reserve will take more aggressive actions to attempt to slow down inflation. The most common move is raising interest rates. These efforts can sometimes trigger an economic downturn, causing the value of stock to plummet further.
As a “bear market” causes the value of stocks to fall, it can be an opportunity to new investors who can benefit by buying stocks at lower prices (and/or more of them).
The benefit comes by holding onto the stocks long-term until the downturn or recession passes and stock values go up.
During a bear market, a selloff begins, creating an opportune time to buy stocks at a discount, something known as “buying the dip.” Even expert investors such as Warren Buffett take advantage of this buying strategy.
Investing is a long game, and to take advantage of buying discounted stocks during a downturn means the new investor will have to hold onto the stocks until their value increases. If you’re in for the long game, the short-term tips won’t necessarily set you back.
This is a technique in which you start investing with small, specific dollar amounts regularly. This allows you to spread out your investments, buying into the market at different times at varying prices that – ideally – balance out each other versus investing in one lump sum all at once. While the latter might maximize returns, it entails taking on more risk.
New investors are advised to set up automatic contributions once or twice a month into an exchange traded fund (ETF) or a mutual fund, both of which will offer diversification. You can access these investment vehicles by opening an online brokerage account.
Expert investor Warren Buffett recommends having an outlook on the long-term. Even though the strongest stocks may take a downturn when the market dips, over time, they are likely to recover. In a 2008 op-ed for the New York Times, Buffett doled out some timeless advice.
“The stock market is a device for transferring money from the impatient to the patient,” Buffett said.
Ride out the highs and lows by holding on to stock from quality companies.
“Invest 10 percent of her cash in short-term government bonds and the other 90 percent in a low-cost index fund tracking the Standard & Poor’s 500 index.”
Buffett suggests Vanguard as an index fund.
