Long-term financial planning hinges on the historic truth that the market will rise over time. The longer the time window, the more likely the market will go up during that window. To that end, investors are encouraged to invest money in the market to pay for college for children, usually a 20-year effort, and eventually retire, usually a 30-40 year effort. On the other hand, a down payment for a home that is accumulated in five years is considered safer in a high-yield savings account.
But even if a retirement that is 30 years away is your only purpose for investing, it is difficult to avoid news stories predicting the coming bear or bull market. Market fluctuations happen, and you sometimes lose money in the short run. More often than not, stories about future financial situations skew negative. Seeing repeated negative headlines can scare potential investors into delaying or avoiding investing as aggressively as possible. This results in significantly less wealth for those long-term goals like paying for college or retirement.
Not only is this fear misguided, it is the opposite of reality for investors that have not yet retired. All short-term market fluctuations are positive occurrences before you retire. Yes, a bull market is great, and it is fun to experience compound interest rapidly growing your wealth. But bear markets are also positive opportunities for investors still drawing an income. Market fluctuations can help you grow wealth for long-term goals through investing.
Investing in a Bull Market: Enjoying Rapid Growth
Everyone loves when the market goes up significantly. The $1,000 you invested last week is now worth $1,050, and by next week that $50 you never had to earn with your own labor has magically become $55. Everyone loves compound interest because we all love growing our wealth without trading time for money.
When the market goes up, folks start thinking it is a great time to invest larger-than-normal sums of money in the market. Do not do this. When the market is high, shares of an equity cost more money than they do when the market is down. It would be like buying a jacket in December when everyone wants to buy a winter jacket: It costs more than if you buy it when it is not the peak season.
To be clear, that does not mean you should stop investing. Continue to invest at whatever your regular investment rate is. Maintaining a regular investment schedule gives you the best probability of enjoying the growth regardless of market fluctuations. This is known as dollar-cost averaging, and it protects you from trying to guess when the market is high or low (essentially gambling) and instead allows you to enjoy growth over time.
While you should not alter your behavior in a bull market, enjoy watching the market grow. I check my net worth more frequently in bull markets and do not sign in to my brokerage account for months when experiencing a bear market. Enjoy the experience of your interest earning its own interest! Especially when you are early in your investing journey, it is exciting to see your wealth grow. Initial wealth growth can expedite your entire wealth building journey, so enjoy it.
Investing in a Bear Market: Market-wide Sales!
Remember that jacket that was so expensive in December? Imagine purchasing it in March instead. It probably costs half of what it did in December, maybe even less, because the department store wants to clear out the winter jackets to make room for shorts.
This is what happens in a bear market: Stocks are on sale.
When a bear market occurs, the average person becomes afraid. They fear that the wealth that took them years to accumulate will disintegrate. Some folks get so afraid that they pull some money out of the market, guaranteeing that they experience a loss in money. Do not do this!
Instead, be thankful that this bear market is happening while you are drawing an income. As long as you are still earning money, a bear market is an advantage to invest more money in the market.
Just by dollar-cost averaging, you buy a greater percentage of the market when investing during a bear market. Say the cost of a share in your preferred index fund was $100 prior to the bear market. The market is down 20%, but so is the cost of your ideal index fund. Now, you can buy a share for $80 instead of $100. If you are like more people, you invest the same amount of money at standard intervals. If you invest $1,000 each month, last month that resulted in 10 shares of your ideal index fund. In the bear market, that same $1,000 gets you 12.5 shares of the index fund. You bought a larger share of the market thanks to the bear market. When the market eventually goes back up, you will own more of it.
A bear market can feel more painful if you have been investing for some time. Seeing your wealth dip to a lower level can feel like a negative experience. However, you are also likely at a point in your career where you make more money than you previously did. A higher income means the ability to invest at a higher level. In fact, you may make more money than you ever have before at the point the bear market hits. That means you have more money to buy shares that are on sale! Even if your net worth took a dip, you get to increase the share of the market you hold, and your wealth will accumulate faster than you can imagine when the market rises again.
While dollar-cost averaging is always the best method of investing, if you find yourself able to contribute even more money during a bear market, this can bolster your financial position further. Buy more of those $80 index funds to maximize the growth on that money when share prices eventually rise to new highs above $100. Bear markets scare investors that do not understand market fluctuations. For savvy investors, bear markets are investment opportunities.
What Changes When I Retire?
If you still receive passive income in retirement, not much. If you are living off of only investment income in retirement, though, a bear market does not have the same positive side as it does when you are receiving income from other sources. The only people that have a real excuse to complain about a bear market are retirees without income outside of investment income.
While their complaints are warranted, they will not result in unsalvageable wealth decline. The market will dip at some point. It will also come back again if you wait a beat. Think about all the negative market news you heard in the past 10 years and compare the market downturns to its overall growth:
Still unconvinced? In 2008, the S&P 500 experienced a 38.49% annual decline. That is devastating, and it was the greatest decline since the 1930s. The S&P 500 also recuperated and achieved a new high in less than three years. If you read our articles and work with us, your investments can probably endure a negative market correction lasting less than three years.
What About All the Negative Messaging?
Fear-inducing headlines grab the attention of concerned readers. Financial journalists will continue warning you about the coming bear market. Sometimes they will excitedly predict how much longer a bull market will last. They get paid to catch your attention, mostly with bad news. Even if the news about market fluctuations seems negative more often than it seems positive, the market experiences positive growth more than it declines. The frequency of negative market news is not indicative of the frequency of market declines.
The market will go up over the course of your life. But sometimes it goes down. If you still receive income from anywhere other than your investments, this is a good thing! Buy more shares while they are on sale so you can enjoy a wealthier future. Investing is a slow but positive experience. Your outlook towards investing should be too.
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