The stock market is still well below its late 2021 highs, which should serve as a stark reminder that stocks don't always go up. Yet time keeps ticking forward as you inch closer to retirement every day.
That time progression happens whether the market is in a good mood or a bad one. That makes it important to have a plan that helps you save for retirement, even when your stocks are moving against you.
With that in mind, here are three strategies that can help you do just that -- save for retirement, even in a bear market. Although there is never a guarantee of success when it comes to investing, these ideas can set you up to ride out a bear market and emerge in a good place to take advantage of any recovery that follows.
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No. 1: Make it automatic
Your 401(k) or similar employer-sponsored retirement plan offers you one tremendous advantage over any other retirement plan at your disposal: You can contribute to it directly from every paycheck you receive. Making your investing automatic helps in a handful of ways.
First, you generally won't miss money you never see. Once you adjust to the reduction in your immediate take-home pay that comes from contributing to your 401(k), you'll continue to make those investments with no further impact on your lifestyle.
That can be a powerful benefit during a bear market since you'll be investing money you know you don't need to cover your near-term costs. This makes it easier to continue investing when the market is moving against you.
No. 2: Invest in broad index funds
Rough markets often coincide with tough patches in the economy and high-profile company bankruptcies. That makes it extra challenging to invest in individual stocks during bear markets. After all, if a company you're invested in goes bankrupt, you're likely to lose your entire investment.
By investing in broad-based index funds, however, that particular risk gets mitigated, thanks to the very nature of those funds. Broad-based index funds invest in many companies, across multiple industries. As a result, even though your index fund may have an investment in a company that winds up bankrupt, it won't have an outsized effect on your overall net worth.
The built-in diversification that comes from broad-based funds means that each stock is only a small portion of your portfolio. As a result, your index fund won't dramatically outperform in a good market, but in a bear market, you shouldn't dramatically underperform, either.
No. 3: Recognize the power of dollar-cost averaging
Putting the first two strategies together can often result in a third strategy: dollar-cost averaging. By making regular investments of the same amount into an index fund, you'll end up buying more shares during down markets than you buy during up markets. The table below shows how that works.
|
Dollars Invested |
Index Fund Price |
Number of Shares Purchased |
|---|---|---|
|
$1,000 |
$20 |
50 |
|
$1,000 |
$40 |
25 |
|
$1,000 |
$50 |
20 |
|
$1,000 |
$80 |
12.5 |
|
$1,000 |
$100 |
10 |
Table by author.
This helps for a couple of reasons. First, during a bear market, it can often feel like you're throwing good money after bad when you're investing. The fact that you're buying more shares with each investment helps you recognize that you're actually getting more for your money.
Second, when you buy more of those shares at a lower price during a bear market, you have that many more shares to participate in any recovery that may follow. Per the table above, $1,000 invested will buy 50 shares of an index fund priced at $20 a share. Should that index fund recover -- say to $40 per share -- your $1,000 invested still owns those 50 shares, but they'd then be worth $2,000, due to that recovery.
In that way, dollar-cost averaging can actually help your net worth recover that much faster once the market starts to turn upwards. This is because the more shares you buy at the lower price, the more shares you own that participate in that rebound. Anticipating that possibility -- and then seeing signs of it happening -- can go a long way toward helping you continue to save for retirement in a bear market.
Bear market or bull market, now's the time to get started
Regardless of whether stocks are still in the grips of a bear market or whether we've finally seen the start of a recovery, these three strategies can help you build a decent retirement nest egg over time. So get started now and make today the day you get back on track for a more comfortable future.
