The S&P 500 -- an index fund containing the largest 500 U.S. companies -- saw one of its worst months in January 2022, dropping close to 10% from Jan. 3 to its lowest point of the year on Jan. 27. While it has since recovered some of its losses, it's still far off from its 2021 highs, leading some investors to question whether we're entering a bear market.
So if we're headed toward a bear market, here's how I would invest $10,000.
Define bull and bear markets
The only thing certain with the stock market is volatility. No matter how fundamentally sound a company or fund may be, its price will rise and fall.
It's best not to use daily stock price movement to define market trends, but long periods of movement can provide insight into market happenings. Investors generally describe a market as either a bull market or a bear market. Bull markets are defined by a steady rise in stock prices, while bear markets are defined by a steady decline.
Spread out your risk
Whether it's a bull or bear market, the one thing investors should always try to do is spread out their risk; you never want the success of your investment portfolio to rely on a few investments. One of the best ways to spread out risk is to invest in index funds. If I had $10,000 to invest during a bear market, I would solely focus on the S&P 500.
Not only is the S&P 500 comprised of companies with large market caps -- usually indicating they're more established and able to survive down periods -- but those companies also span many industries. It's not uncommon for industries as a whole to grow or decline together, so being exposed to multiple sectors helps you invest in the market as a whole.
Don't invest it all at once
If I were investing $10,000 in a bear market, the one thing I would make sure of is that I didn't invest it all at once. Instead, I would use dollar-cost averaging to help hedge me against the possibility of investing a lump sum right before a huge drop in a stock's price.
The frequency of your investments isn't as important as making sure you're consistent and make regular investments. You can choose to use the following structure:
- Weekly: $10,000/50 weeks = $200 weekly
- Monthly: $10,000/12 months = $833 monthly
- Quarterly: $10,000/four quarters = $2,500 quarterly
Dollar-cost averaging -- which is what happens if you make contributions to a 401(k) plan -- is one of the best investment strategies you can use. It eliminates a lot of emotions involved with investing and the urge to try to time the market, which is virtually impossible to do long term.
Play the long game
During a bear market, cash can be a valuable asset because it gives you a chance to take advantage of lucrative investment opportunities if you choose. If you believe in a company or fund and it experiences a price drop, you can view this as a chance to get it at a "discount."
If you're a long-term investor, you shouldn't be discouraged by bear markets. If you're focused on the long run, short-term drops in stock prices shouldn't deter you from investing or make you feel as if you're losing money. If anything, it's a chance to lower your cost basis -- which is essentially the average price you've paid for a particular investment.
For example, if you buy 10 shares of a stock price while the price is $100, your average cost basis is $100 per share. If the price drops to $80 and you buy 10 more shares, your average cost basis is now $90. In the long run, lowering your cost basis ensures you increase your profitability when it gets to the point where you're ready to sell your investment.