Many people hear the words "bear market" and think they ought to run and hide. After all, the idea of investing when the stock market is down can be scary.
But actually, bear markets offer solid investment opportunities -- because stocks are cheaper to buy on a whole. If you're thinking of putting money into stocks in the next few weeks, that could be a potentially lucrative move, especially in the long run. But before you do, make sure to answer these important questions.
1. Do I have a fully loaded emergency fund?
It's too soon to tell what impact COVID-19 will ultimately have on the U.S. economy, and whether a full-blown recession will come to be. But one thing's for sure: Things are pretty shaky right now, so before you put any spare cash you have into stocks, you should first make sure you have enough money in the bank to cover about six months of essential living expenses. If you have little to no money earmarked for emergencies, boosting your savings account balance should take priority over stock investments.
2. Do I expect to need or want this money within the next 10 years?
Many people who invest during bear markets expect to see a great return on their money within a year or two. That may happen, or it may not -- we can't predict how long this bear market will last, especially since the circumstances surrounding it are so unique. As such, you should only invest money today that you're convinced you won't need to touch for the next 10 years. That means don't invest the down payment you've saving up to buy a home, or the funds you need to throw a wedding next year.
3. What's my investing strategy going to be?
Before you pump money into the stock market, it's important to have a strategy in mind. If you're new to investing, take some time to think about your goals and how you want to put your money to work. Should you buy growth stocks to score some potentially large returns? Or should you focus on value stocks, particularly those that have been around for a very long time? Come up with a strategy you're comfortable with rather than jumping in blindly.
4. How much legwork do I want to do?
It takes time to research stocks and figure out which are the most worthy of your money. If you lack the patience or desire to put in that work, you may want to consider loading up on index funds rather than individual stocks. The beauty of index funds is that they take much of the guesswork out of investing. For example, if you buy an S&P 500 index fund, that fund will simply track the movement of those 500 stocks so you'll get to capitalize on broad market gains. You'll also get the benefit of instant diversification. Of course, you don't have to buy an S&P 500 fund, but the point is that if you don't want to spend hours vetting individual companies trying to understand their business models, index funds are a fairly easy and reliable alternative.
Investing during a bear market could pave the way for some very impressive returns down the line. Just make sure to answer the above questions before you dive in so you don't make a mistake you end up regretting.