{"id":2109,"date":"2008-10-13T05:00:33","date_gmt":"2008-10-13T12:00:33","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=2109"},"modified":"2024-03-05T13:45:22","modified_gmt":"2024-03-05T20:45:22","slug":"investing-in-a-bear-market","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/investing-in-a-bear-market\/","title":{"rendered":"Investing in a Bear Market"},"content":{"rendered":"
On 09 October 2007, the Dow Jones Industrials hit a record high<\/a>, closing at 14,279. What a difference a year makes: Last Friday, the Dow closed at 8451<\/a>, and there’s a good chance it will drop even further.<\/p>\n Unsurprisingly, my inbox is filled with e-mails from people who wonder what they should do. Here are some typical questions from readers like you:<\/p>\n These are fantastic<\/i> questions. Unfortunately, there are no fantastic answers. Nobody knows what the market will do. Nobody.<\/p>\n I watched a news program today in which a pundit predicted the market has hit bottom and is ready to make a recovery. But there are others who believe stocks will continue to fall. I am by nature an optimistic guy, but even I start to feel gloomy and scared for the future when I read and hear some of this stuff. (Peter Schiff<\/a>, especially.)<\/p>\n Unfortunately, neither I nor anyone else can tell you whether now is a good time for you to invest in the stock market. Only you<\/i> can make that decision. I can, however, suggest four fundamentals to help guide your thinking.<\/p>\n The first thing you should do before you invest \u2014 now or at any other time \u2014 is to gauge your risk tolerance. When you buy stocks, there is always<\/i> an element of risk<\/a>, the chance that the value of your investment will fall.<\/p>\n Some investors can tolerate more risk than others. I used to believe I could stomach a lot of risk. I thought I was bold and aggressive. Then I made a couple of dumb investments, culminating with the loss of my entire 2007 Roth IRA contribution when The Sharper Image went bankrupt<\/a>.<\/p>\n I’ve learned that I don’t<\/i> actually have a high risk tolerance. I’ve funneled all of my money into index funds<\/a>, mutual funds that track the broad movement of the market. These still contain an element of risk \u2014 the “broad movement of the market” has caused my index fund to drop 17.3% over the past two weeks! \u2014 but it’s risk I can tolerate. I know that my investment is doing no worse than the market as a whole.<\/p>\n There are several online tools that can help you assess your own risk tolerance:<\/p>\n If your risk tolerance is high, you can put more money into stocks. If your risk tolerance is very low, the stock market may not be right for you. Remember, a more risky type of stock has greater potential for gain as well as greater potential for loss. Lower-risk stocks have smaller swings over the long term. If your investments are geared toward retirement, you should lower the overall risk level of your portfolio as you age.<\/p>\n It’s important to know why<\/i> you’re investing. What is your purpose? What are your goals? Do you need the money in a few years, or do you still have 40 years before you’ll need to draw upon it? Are you looking for the maximum possible growth? Or do you simply want to protect your capital \u2014 to not lose<\/i> money?<\/p>\n That’s not to say that the stock market is always<\/i> the best choice, even for long-term investments. Coupled with your risk tolerance, your investment goals can help you determine the proper asset allocation<\/a> \u2014 the best way to divide your money among possible investments.<\/p>\n Diversification is one of the cornerstones of Modern Portfolio Theory<\/a>. Though it seems counter-intuitive, research indicates that owning investments of different types offers higher returns at lower risk. Diversification is simply the practice of owning many investments, of not putting all your eggs in one basket.<\/p>\n There are several ways to approach diversification, including:<\/p>\n This asset allocation wizard<\/a> from CNN Money poses a few basic questions about your goals and your risk tolerance to determine a framework for diversifying your investments. I told it that I needed my money in 20+ years, could handle some risk, was okay missing my target by a couple years, and view market sell-offs as a time to buy more stocks. The calculator’s recommendation? Almost exactly<\/i> the same asset allocation as FFNOX<\/b><\/a>, the index fund I’ve selected for my 401k.<\/p>\n Diversification can’t prevent stock market losses, but it can certainly reduce them. (Note that it also reduces market gains, however.)<\/p>\n The final fundamental concept is also the most important. I believe that education is the most essential component of any investment plan<\/b>.<\/p>\n Often, fear is a product of ignorance. When we don’t understand something, it scares us. But ignorance can be overcome through education. If the market meltdown makes you anxious, I urge you to do some research. Visit my collection of financial literacy resources<\/a> and watch the video series about saving and investing. Go to the library and borrow one of these books:<\/p>\n I wish I could make all new investors set aside a few hours to read The Four Pillars of Investing<\/i>. There’s a good chance it won’t make today’s investors any less nervous, but at least they’ll have a basis for making informed decisions.<\/p>\n In The Only Investment Guide You’ll Ever Need<\/i>, Andrew Tobias<\/a> writes, “Buy low and sell high. You laugh. Yet most people, particularly small investors, shun the market when it’s getting drubbed…It’s precisely when the market looks worst that the opportunities are best.”<\/p>\n We all know<\/i> this, but although the market is currently getting drubbed, the average person isn’t buying. The average person is panicked. The average person is selling. Friday’s edition of Marketplace<\/i> featured some shocking stats. Last week, investors pulled $43 billion out of mutual funds.<\/b> Two weeks ago, that number was $6 billion. The week before that it was only $5 billion. Why is the market dropping? One reason is that the average investor has panicked.<\/p>\n If the average person is selling, then who’s buying? Who’s crazy enough to buy when everyone else wants out of the market? I asked some of my colleagues about their recent money moves. Here’s what they said:<\/p>\n What about me? I recently took as much money as I could it and pumped it into FFNOX<\/b><\/a>. I bought in at $24.20. Its current value is $20.01. It’s down 17.31% since I bought it. So what? If I had bought it a year ago, I would have paid $32.71. If I get a chance to buy more FFNOX in the next few months, I will. Yes, it’s scary to buy as the market is falling, but I know that I’m purchasing a broad-based diversified index fund. Also \u2014 and this is key \u2014 I believe that the market will<\/i> turn around.<\/p>\n Now maybe all of us personal finance bloggers have been drinking the same Kool-Aid. Maybe we’re suffering from mass delusion. If so, we’re not the only ones. Warren Buffett, the world’s richest man, is on a buying spree<\/a>. So are Mark Cuban<\/a> and many others.<\/p>\n But you don’t care about all those other people, do you? You care about yourself and your<\/i> money. Rightfully so. What should you do? You<\/i> are the only one who can make that call. You are the only one who knows your own risk tolerance, your investment horizon, and your savings goals. Educate yourself about investing, and then make decisions based on your own objectives and your own assessment of the market.<\/p>\n If you’re still uncertain, seek professional advice. Find a fee-based financial advisor to help guide your decisions.<\/p>\n In Benjamin Graham’s classic The Intelligent Investor<\/a><\/i>, he writes:<\/p>\n The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because<\/u> it has gone up or sell one because<\/u> it has gone down.<\/b> He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”<\/p><\/blockquote>\n If you believe stock prices are still high, then steer clear of the market. If you think they’re low, then buy. And remember: Unless you sell your stocks, you haven’t lost anything at this point \u2014 it’s all on paper.<\/b><\/p>\n During the tech bubble, I was part of an investment club. The other guys and I chortled with glee as we bought tech stocks (Celera Genomics<\/a>, Home Grocer, Triquint Semiconductor<\/a>) near the top of the market. We thought we were going to be rich. We weren’t laughing so hard when the bubble popped; we closed the club and sold the stocks at huge losses. What lesson did I learn? The time to buy is when prices are low, not when they’re high.<\/p>\n I believe that for the average long-term investor, the best course of action right now is to make regular scheduled purchases of low-cost diversified index funds. That’s what I’ve done, and that’s what I intend to keep doing.<\/p>\n","protected":false},"excerpt":{"rendered":" On 09 October 2007, the Dow Jones Industrials hit a record high<\/a>, closing at 14,279. What a difference a year makes: Last Friday, the Dow closed at 8451<\/a>, and there’s a good chance it will drop even further.<\/p>\n Unsurprisingly, my inbox is filled with e-mails from people who wonder what they should do. Here are some typical questions from readers like you:<\/p>\n These are fantastic<\/i> questions. Unfortunately, there are no fantastic answers. Nobody knows what the market will do. Nobody.<\/p>\n","protected":false},"author":3287,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[492],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/2109"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3287"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=2109"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/2109\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=2109"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=2109"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
<\/span>Know your risk tolerance<\/span><\/h2>\n
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<\/span>Set investment goals<\/span><\/h2>\n
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<\/span>Diversify<\/span><\/h2>\n
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Educate yourself<\/h3>\n
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<\/span>Investing in real life<\/span><\/h2>\n
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Conclusion<\/h3>\n
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