Standard advice for new investors is to start early and make investments on a regular schedule. As the stock market went up over the last dozen years it was easy to see why one would want to invest. Now as the market is in free fall with no clear end in sight, one might think that beginning to invest in a bear market might not be such a good idea. But the fact of the matter is that stocks have been overpriced for much of the last decade. They are descending toward more realistic fundamental values. That gives a new investor the opportunity to get in on the “ground floor” of the next bull market rally!
Investing in a Bear Market
The S&P 500 was down 34% year to date by mid-June 2022 before an uptick took it to being down 18.5% year to date. Despite a similar uptick the Nasdaq is down 27% year to date as the end of June 2022 approaches. The US Federal Reserve upped its monthly rate increase to 0.75% from May’s 0.50% in its attempts at taming inflation. Fed Chair Powell has admitted to Congress that a recession is a distinct possibility. That selfsame risk of a recession is what has driven the stock market into bear market territory this year. If you want to begin investing, how should you go about investing in a bear market?
Bear Market Investing Strategies
Fortune recently wrote about how to invest during a bear market and recession. First of all, not all stocks are heading downward when the overall market is in bear territory and the economy is headed toward a recession. The S&P energy sector and stocks like Exxon Mobil have been in positive territory this year. Exxon Mobil was up 63% by the first week in June due to the high prices of oil and natural gas. It is now “only” up 50% due to increasing fears of inflation. So, one bear market investing strategy is to find the market sectors and individual stocks that are doing fine and invest in them. The other approach is to look to the long term and invest in value stocks while their prices are depressed.
Intrinsic Stock Value As an Investment Guide
Exxon Mobile is up because of Russia’s invasion of Ukraine which has driven up the price of oil. It fell recently because of the looming risk of a recession with lower energy consumption. Over the long term Exxon Mobile may not be the best choice for investing. Long term investors use a concept called intrinsic stock value when investing in stocks. The point of this approach is to determine which stocks will be making money in the coming months and years. Stocks with high forward-looking cash flow will be moneymakers and will have progressively higher stock prices over time. An investor who follows this approach determines the intrinsic value of a stock based on forward-looking earnings and compares that price to the current stock price in order to decide whether to buy, sell, or hold that stock. This approach works as well during bear markets as at other times.
Investing Using Dollar Cost Averaging
When the stock market is falling there is a risk that you will buy stocks only to see them immediately fall in value. There is also at risk that you will miss the bottom of the market because you have waited to long to buy. A useful approach that addresses these issues is dollar cost averaging. Using this approach an investor purchases the same dollar value of stocks every week, payday, month, or quarter. When prices are overly high this results in fewer stocks being purchased and when prices are low it results in more stocks at bargain prices. Over the long haul an investor who uses this approach tends to pick up stocks at bargain prices during bear markets and not buy excessively when a bull market climbs in price far beyond what fundamentals support.
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