The stock market has just entered a ‘bear market,’ presenting an opportunity for new investors to purchase stocks at a discount, and making the right buys can pay off over the long term. Here’s why…
When the stock market takes a dip of 20% or more, from recent highs, it’s called a “bear market.” The opposite effect, making a 20% gain, is called a “bull market.”
On Monday, June 13, 2022, the S&P 500 fell more than 21% below its record high in January, and the first time it closed in “bear market” territory since March 2020, CNBC reported.
During a bear market, stock values fall. As a result, a selloff may begin as some investors may move their money into other areas that promise quicker returns in the short term.
With stocks selling at lower prices, it can be an opportune time for new investors to build a stock portfolio, and especially for those who have been waiting to get into the game and purchase stocks from quality companies.
The stock market is a long game which pays dividends over time. Buying stocks at lower prices during the dip and holding onto them until their value increases and returns to previous highs is how new investors can benefit.
Buying stocks at a discount during a “bear market” is something known as “buying the dip.” Expert investors such as Warren Buffett take advantage of this stock purchasing strategy.
If you’re in for the long game, the short-term dips won’t necessarily set you back.
Experts advise new investors to not purchase stocks in one lump sum (even though it may maximize returns, it adds more risk), and instead, use a strategy known as “dollar-cost averaging.”
With dollar-cost averaging strategy, the investor invest a fixed dollar amount on a regular basis, regardless of the share price.
This technique allows investors to buy into the market at different times at varying prices. The idea is that this strategy ideally balances out investments and provides diversification.
Investors can set up automatic contributions once or twice a month into an EFT or mutual fund, which will be discussed next.
Some of the most popular investments for beginner investors are an exchange traded fund (ETF) or a mutual fund. Both offer diversification. You can access these investment vehicles by opening an online brokerage account. Buffett suggests Vanguard as an index fund.
The Vanguard S&P 500 ETF (VOO) tracks the entire index and offers low management fees, currently 0.03%, which amounts to 30 cents for every $1000 invested. That means $3 per year for every $10,000 invested.
A bear market can present an opportunity for new investors who already have savings set aside for investing.
Further, by using strategies such as dollar-cost averaging, you can create a diversified portfolio as a variety of stocks may become available at discount prices at different times, especially if a bear market persists or a recession occurs. By not spending all your money at once and purchasing in a lump sum, you leave additional funds available to take advantage of other opportunities as they occur.
Lastly, make sure to keep your investment savings in high-yield accounts, those that offer above-average rates.