How to Invest During a Bear Market

Stock charts make it easy to see how the market’s doing at any given time — green means up, red means down — and during a bear market, it’s generally red as far as the eye can see.

For many people, the color red means one thing: stop. But to stop investing generally is a bad idea when the market gets scary. Worse yet? Selling stocks out of fear.

It takes resolve to keep investing during a bear market. These market events, defined as declines of at least 20% in asset prices from a recent high, likely will happen a handful of times during your investing lifetime. In the past 50 years, the S&P 500 has experienced six bear markets, according to data from Yardeni Research. (Confused? Get some background on bear markets.)

Given that bear markets are somewhat inevitable, here are some tips for how to make the most of investing during these times.

Make dollar-cost averaging your friend

Say the price of a stock in your portfolio slumps 25%, from $100 a share to $75 a share. If you have money to invest — and want to buy more of this stock — it can be tempting to try to buy when you think the stock’s price has cratered.

Problem is, you’ll likely be wrong. That stock may not have bottomed at $75 a share; rather, it could tumble 50% or more from its high. This is why trying to pick the bottom (or “time” the market, as many people call it) is a risky endeavor.

A more prudent approach is to regularly add money to the market with a strategy known as dollar-cost averaging. This helps smooth out your purchase price over time, ensuring you don’t pour all your money into a stock at its high (while still taking advantage of market dips).

There’s no doubt that bear markets can be scary, but the stock market has proven it will bounce back eventually. If you shift your perspective, focusing on potential gains rather than potential losses, bear markets can be good opportunities to pick up stocks at lower prices.

Diversify your holdings

Speaking of picking up stocks at lower prices, boosting your portfolio’s diversification — so it includes a mix of different assets, including stocks, bonds and index funds — is another valuable strategy, bear market or not.

During bear markets, all the companies in a given stock index, such as the S&P 500, generally fall — but not necessarily by similar amounts. That’s why a well-diversified portfolio is key. If you’re invested in a mix of relative winners and losers, it helps to minimize your portfolio’s overall losses.

If only you could know the winners and losers in advance, right? Because bear markets typically precede or coincide with economic recessions, investors often favor assets during these times that deliver a more reliable, or steady, return — irrespective of what’s happening in the economy.

Often referred to as a “defensive” strategy, such an approach might mean loading up on the following stock types:

  • Shares of noncyclical companies. These companies don’t see a precipitous fall in demand if the economy’s in trouble, because they sell essential goods or services like food (sold at a grocery store), health care or utilities, for example.
  • Dividend-paying stocks. Even if stock prices aren’t going up, many investors still want to get paid in the form of dividends. That’s why companies that pay higher-than-average dividends (including utilities) will be appealing to investors during bear markets.

And speaking of steady, bonds also are an attractive investment during shaky periods in the stock market because their prices often move in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding more money to these assets may help ease the pain of a bear market.

Focus on short-term strategies

If you can’t stomach watching the value of your portfolio plummet during a bear market, it may be best to ignore it. That’s right, don’t log into your account — just let it be.

In a bear market, just like in normal times, continue adding money to your retirement vehicle, a 401(k) or IRA; experts recommend a target of about 15% of your gross income. With savings beyond that amount, it’s perfectly fine to focus on short-term goals. If you have a life event coming in the next five years — buying a home, having a baby, sending a kid to college or retiring — it’s best to keep that money out of the stock market anyway.

Short-term strategies are good for just that — the short term. In 2018, for example, high-yield savings accounts delivered higher returns than the major stock indexes, most of which ended the year in negative territory. But the stock market’s still the long-term winner, with the S&P 500 delivering average annual returns of about 10%.

When saving for the short term, make sure your vehicles deliver a competitive return. Here are some current ranges:

  • CDs (certificates of deposit). Potential annual return: 2% to 3%.
  • High-yield savings or money market accounts. Potential annual return: 1% to 2%.
  • Peer-to-peer lending. Potential annual return: 3% to 8%.

Be patient

Bear markets test the resolve of all investors, professionals included. While these periods are difficult to endure, history shows you probably won’t have to wait it out too long. Bear markets tend to be shorter than bull markets (1.4 years, on average, versus 9.1 years) and less severe (with average cumulative losses of 41% compared with average cumulative gains of 470%-plus), according to data compiled by First Trust Advisors.

The article How to Invest During a Bear Market originally appeared on NerdWallet.

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Investment Strategies for 2019: How to Conquer Q1

After a wild 2018, when the S&P 500 fell the most since the financial crisis, many people are reevaluating their investment strategies.

And that’s probably a good idea, especially as the current bull market could turn 10 years old this March. At NerdWallet, we generally recommend you don’t fuss too much with your retirement portfolio, opting instead for simple, low-cost strategies. But the reality is many people need to tap stock investments sooner than retirement, so a hands-on approach may make sense for these investors.

Like many New Year’s resolutions — diets, exercise or budgeting, for example — investment strategies are personal. But unlike those others, coming up with fresh ideas for what to do with your investments can be difficult. Two experts offer tactical ideas to consider this quarter.

1. Map out your 2019 goals

Do you have a blueprint for where you plan to invest money this year? If not, it’s time to get to work.

The first quarter should serve as the foundation for your strategy — with tweaks to come later in the year, says John Augustine, chief investment officer for Huntington Private Bank, based in Columbus, Ohio. He urges investors to get the following basics covered:

  • 401(k). Set up regular contributions that, if possible, hit 2019’s $19,000 limit — irrespective of what’s happening in the market. Rebalance your 401(k) portfolio as needed.
  • IRA. You fund an IRA for tax year 2018 up until the tax deadline in mid-April. Then focus on your 2019 IRA contributions (the limit goes up from $5,500 to $6,000 this year, or $7,000 for people 50 or older).
  • Savings. Set a savings plan and goal for the year — and stick to it.

Consistently adding money to the market — a strategy known as dollar-cost averaging — will be especially important, as Augustine believes the first quarter could be the year’s most volatile. But that’s hardly new; in a 25-day span in late December and early January, the S&P 500 notched daily gains or losses greater than 2% on eight different days. By comparison, there were no 2% moves in all of 2017.

The source of much of that volatility — the prospect of slower global economic growth — has many investors worried a market crash and U.S. recession are more imminent. The odds of a recession by the end of 2019 are about 21%, according to a gauge from the Federal Reserve of New York.

Even as investors fret about the next recession and corporate earnings growth that’s expected to be more subdued ahead, U.S. companies remain more attractive than international stocks, Augustine says. “Keep most of your money at home,” he advises, and consider buying funds tracking 2018’s laggard industries (such as industrials).

» What’s on the horizon? Consult NerdWallet’s monthly market outlook

Looking to have some fun? Augustine has a simple strategy for all ages: “Buy a piece of your life.” By this he means examining where you spend money that older (or younger) generations don’t — and investing 10% to 20% of your IRA in five related stocks.

For example, baby boomers might invest in health care stocks, whereas millennials might buy shares of streaming entertainment services. “The goal is to have some fun and engage with your IRA,” Augustine says.

» Need an account? See NerdWallet’s picks of the best IRA providers

2. Craft a plan to protect against losses

The S&P 500 narrowly escaped entering a bear market (defined as declines in excess of 20%) in December, but such an event could be traumatic if your investing horizon is a few years, such as if you’re approaching retirement. Now’s a good time to assess whether your objective is maximizing profits or protecting assets from losses, says Chris Cook, founder and president of Beacon Capital Management in Centerville, Ohio. Here’s how to gauge where you are on that scale:

  • Maximizing profits. The market’s a proven long-term bet, so buy-and-hold investors with decades to invest probably shouldn’t sell anything — and market declines could actually be an opportunity to buy stocks at lower prices, Cook says.
  • Protecting from losses. If you plan to tap money in your portfolio within the next few years or already are doing so, focus on protecting those assets from more severe market declines, Cook says. People often forget the effects of compounding when the market’s falling; after a 10% slump, you need to gain 11% to recoup those losses, he adds.

If protecting some (or all) of your assets is a goal, spend time deciding on a strategy of when to sell — and when to buy again. Following pre-established rules is key to success with such timing. Oftentimes, people wait too long to sell — say, when their portfolio has slumped 20% — at which point they’ve experienced the brunt of the pain and may as well ride it out, Cook says.

» Read more: How to sell stock

What does such a strategy look like? It depends on your objectives, but Cook recommends the following thresholds as a guideline for a diversified portfolio (meaning one with a variety of assets — bonds, stocks and index funds, for example):

  • Sell assets when your portfolio’s value drops 10%. “That’s usually a sign that sentiment is shifting,” he says, adding that his research shows 10% corrections suggest a 50% chance of a bear market.
  • Buy the same assets back in equal measures when the market has recovered 15% from its bottom, Cook advises.

“The idea is to have your game plan in place, so you know when you’re going to execute it, and then follow your rule,” Cook says. “That takes emotion out of the equation.”

The article Investment Strategies for 2019: How to Conquer Q1 originally appeared on NerdWallet.

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Don’t Let Your Love of Logos Become a Financial Faux Pas

If you don’t keep up with the Kardashians, here’s what you’re missing lately: Logos are back in fashion.

A few months ago, Kim Kardashian posed in head-to-toe clothing dripping with Fendi’s logo next to Louis Vuitton-emblazoned garbage bins (yes, really). More recently, model Hailey Baldwin was photographed in a denim-on-denim look with Versace written all over it — literally. And in a recent video with wife Beyonce, Jay-Z wore a suit covered in, you guessed it, a repeating Gucci logo.

Despite Us Weekly’s claims, stars aren’t just like us — and most of us can’t afford their style. An ensemble similar to Baldwin’s retails for $2,600, and a suit like the one Jay-Z rocked will set you back nearly $6,500. All of which makes part of Kardashian’s get-up seem comparatively cheap; Fendi sells pantyhose for “just” $220.

Some industry folks refer to the trend as logo mania, or Guccification. Whatever you call it, it’s been making its comeback the past two years or so, says Oliver Chen, a managing director who analyzes retail and luxury goods companies at financial services firm Cowen & Co.

What’s different now compared to other periods when logos dominated fashion — say, the 1980s — is how consumers interpret this trend, he says.

“The logo is worn differently; it’s more irreverent now,” Chen says, adding that there’s a sense of nostalgia and playfulness in today’s logo worship.

If this trend is a fashion do in your book, here are some tips for wearing the hippest apparel without putting your finances in peril.

Today’s fashions versus tomorrow’s passions

Chasing fashion trends can be fun. But before you rush to buy, make sure your love of logos doesn’t result in a financial faux pas. Thanks to the magic of compounding interest, every dollar you spend today is a dollar-plus not saved for the future. Before spending hundreds (or thousands) of dollars on today’s fashions, can you honestly answer “yes” to the following three questions?

  1. Are you free of high-interest debt obligations, like credit card debt?
  2. Do you have a rainy-day fund established that can cover your monthly expenses for at least three months?
  3. Are you regularly setting aside money for retirement with a 401(k) and/or an individual retirement account?

If you answered “no” to any of the above, resist that impulse purchase for now. Instead, invest some time with a budget calculator to see how much you can afford to spend on things you want. NerdWallet recommends a 50/30/20 budget, in which no more than 30% of your take-home income is allocated to wants.

Fashion wants aren’t necessarily needs

Conspicuous fashion doesn’t offer many ways to fake the look on the cheap — you’re either wearing a brand-name piece or you’re not.

Consumers today are bombarded by marketing campaigns designed to get them to make a purchasing decision quickly, says Kathleen Grace, a certified financial planner and managing director at United Capital Financial Advisers in Boca Raton, Florida. And those “wants” can seem like “needs” in a culture where “it’s become more prevalent to be flashy.”

Even Grace, who wrote the financial planning novel “Prince Not So Charming,” checks in with others to keep herself accountable before making impulse purchases.

“I love Chanel bags and shoes, but I’ve learned that when you put time in between that final purchasing decision, you make better decisions,:” she says.

When you’re deciding whether those “wants” are justified, Grace recommends the following:

  1. Identify how and why you spend money. Using behavioral finance learnings, United Capital offers an interactive tool that can help you make better spending decisions.
  2. Ask yourself why. Contemplating a $700 pair of shoes? Ask why you need those in lieu of a $100 pair, and whether this purchase justifies spending less money on something else — say, a trip.

“Everything in life is a trade-off,” Grace says.

Paying full price is boring

Luxury brands are expensive, but consumers can incorporate these looks into their wardrobes without paying full price.

“There are no rules,” Chen says. “Vintage stuff is cool, too; it’s all about how you make it your own.”

This logomania trend comes at a time when the luxury fashion industry is undergoing a “revolution,” becoming increasingly inclusive and accessible to more consumers, he says.

Don’t feel obliged to rock logos head-to-toe. “I don’t think you have to over-invest. You can pull off a look by mixing and matching,” Chen says. And there are ways to stay on trend for cheap — shopping at vintage stores and consignment websites, participating in the sharing economy or upcycling old items from your (or someone else’s) closet, he suggests.

Grace balances a love of luxury items with a desire to get the best deal. “There are some amazing websites today where you can buy brand-name items much cheaper,” she notes.

Buy pieces with a long shelf life

Investing in the stock market has a proven track record for delivering long-term returns. (Read more about how to start investing.) But luxury pieces can also return more than compliments for some consumers. That is, you may be able to recoup some of the money you initially spent when you resell a look you’re done with.

To do so, prioritize spending on items with a longer shelf life — both fashion-wise and in terms of durability. Consider this: For about the same amount ($950 or so), you can currently buy a leather wallet at Chanel or a cotton T-shirt at Fendi.

In addition, some brands retain their value better than others, Chen says. Time spent researching a big-ticket purchase in advance may reap bigger returns when it comes time to part with an item. And you may be surprised by how much money you’ll get from an item that you’ve derived a lot of pleasure from, he adds. “People’s closets can have a lot of liquidity.”

The article Don’t Let Your Love of Logos Become a Financial Faux Pas originally appeared on NerdWallet.

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Intern With a 401(k)? Here’s How to Make It Pay

Some interns spend their days fetching coffee. Others get their hands on something even hotter: their first 401(k).

Not so long ago, scoring an internship that actually paid might have seemed novel. But recent studies by the National Association of Colleges and Employers have found that among graduating college seniors, paid internships are increasingly the norm, and that at least half of employers report offering 401(k) plans to their interns.

If you scored an internship that comes with a 401(k), here are three things you need to know.

1. It’s not too early to think about retirement

During an internship, planning for retirement probably isn’t one of your top priorities — and understandably so. That said, it’s never too early to begin thinking about your future. A 401(k) is a savings and investing plan offered by companies to their employees. It offers tax breaks that encourage saving, and serves as the primary nest egg for many American retirees. (New to all this? Learn more about the various perks a 401(k) offers.)

When it comes to saving, time is the most valuable asset you’ll ever have. And the earlier you begin saving for retirement, the more you’ll have once that time comes. For example, if you were to set aside just $1,000 at the age of 20 and never touched that money again, it would balloon to more than $16,000 by your mid-60s, assuming an annual average return of about 6%. You can thank compound interest for all that extra money.

Unfortunately, a one-time contribution won’t come even close to cutting it when saving for retirement. That’s why you’ll need to open a 401(k) — yes, even in your 20s — and kick-start a discipline of saving that you’ll maintain and build upon over time.

2. You should contribute — probably

Even if more employers are offering a 401(k) to interns, you still should take a moment to appreciate the value of this perk — especially if the company will match some portion of your contributions. What that means is your employer adds money to your 401(k) along with you, up to a certain limit. Unfortunately, this still isn’t a universal benefit for all American workers.

So you’ve got the internship and you’ve got the 401(k) — time to start contributing, right? The likely answer is yes — so long as you can afford to do so. While everyone’s personal financial situation is unique, here are a couple of things you should consider when deciding whether to fund a 401(k) during an internship:

  • You shouldn’t go into debt to save for retirement. Saving for the future is essential, but it shouldn’t come at the expense of your present financial situation. Make sure you have a good understanding of what your monthly expenses will be during your internship (especially if you’ve relocated). Don’t contribute to that 401(k) if it means you’ll amass high-interest credit card debt, for example, or forgo building an emergency fund. If you’re too aggressive saving now for retirement, dipping into your retirement account later often incurs a hefty tax penalty.
  • This internship won’t last forever. An internship is temporary, so you’ll need to consider what’s next on the horizon. If you’re still in school, you’ll need to weigh whether any extra money you have is better put toward retirement or paying for future school-related expenses. And the right answer may be to balance the two goals. Meanwhile, if you’ve finished up school but don’t have a full-time job lined up yet, you may want to be more conservative about saving for retirement in lieu of padding that emergency fund.

Once you’ve sorted through the question of should-I-or-shouldn’t-I contribute, you’ll need to tackle another: What’s the right amount? If your employer matches some portion of your contributions, that is free money, so a goal might be to contribute enough to capture all of that match. But again, don’t be too aggressive with your 401(k) contributions, lest they cause you other financial woes in the short term.

3. You should take your 401(k) with you

On the last day of your internship, you’ll take any belongings when you leave. Plan to do the same with your 401(k). The difference is you’ll want to roll that over into an IRA — and the sooner, the better. No dog tricks here — in the retirement world a “rollover” means moving money from one type of tax-advantaged account to another.

An IRA, or individual retirement account, is similar to a 401(k) in that it offers people tax breaks for saving toward retirement. But IRAs also typically include a broader array of investments to choose from and generally lower fees than employer-sponsored plans. You do have other options, however:

  • You could roll over that internship-era 401(k) into your next employer’s 401(k) plan. But do this only if you find low costs and satisfactory investment choices.
  • You could leave the money in your old 401(k). Downsides here are you won’t be able to contribute to it in the future, and you may no longer have an HR team to assist with questions.
  • You could cash it out. But seriously: Don’t. You’re risking significant tax penalties and costing yourself a valuable head start on saving for the future. This option is virtually never worth it.

Generally speaking, an IRA is the best option because of the perks mentioned above. Review NerdWallet’s picks for the best IRA providers for rollovers.

The article Intern With a 401(k)? Here’s How to Make It Pay originally appeared on NerdWallet.

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