How to Invest for Retirement During a Bear Market

I wouldn’t wish this bear market on anyone.

A lot of people have been losing a lot of money — not just billionaires, but ordinary working people who have been salting away savings for years.

It will be even worse for those who lose their jobs in a recession, which could easily happen as the Federal Reserve tries to wring inflation out of the economy.

This is, in short, a rough moment for the economy and the markets, and may seem to be the wrong time to put fresh money into the stock market. Yet that is exactly what I’m suggesting, not just for people like me who have become accustomed to buying shares steadily over many years, but for those who are just starting out and are likely to have decades of investing ahead of them.

In fact, when you are young, investing during a bear market can be great for your future wealth, and, perhaps, your eventual retirement.

This may seem counterintuitive but the logic is simple. Buying low and selling high is the core of successful investing. If you invest when stock prices are falling, yet have considerable time for a rebound, you are likely to prosper.

What’s more, if you do this repeatedly over many market cycles, the benefits of compound returns will kick in. You will be earning money on top of the gains of previous years.

Invest this way and you can accumulate a remarkable nest egg.

My last column proposed steps for getting started at a time like this:

• Pay your bills first, and set aside enough money for an emergency before putting any money at risk.

• Buy stocks — and, when it’s right for you, bonds — using cheap, diversified index funds that track the entire market.

• Treat investing as a marathon with a 10-year horizon at a minimum and, preferably, with a much longer goal.

Inevitably, my thumbnail summary omitted many things. Several readers suggested other issues that I’ll address now, in this ongoing guide to starting as an investor:

• Benefit from the market’s ups and downs through what is known as dollar-cost averaging.

• Take advantage of workplace retirement plans.

• Use target-date funds, but only in tax-sheltered accounts.

Veteran investors, don’t worry. I’ll return to the issues preoccupying you in future columns.

Early price declines help

Dollar-cost averaging entails putting money into the market regardless of whether stocks and bonds rise or fall. Your average cost will drop during a bear market, and this will bolster your long-term returns.

If you do this deliberately and understand the benefits of buying shares when they are cheap, you may be able to avoid the terrible feeling that other people have during market declines.

Consider what would have happened if you had started to invest in the first commercially available stock index fund, the Vanguard 500 stock index fund, in July 1980. You would have experienced a nasty bear market that began in November 1980 and lasted until mid-August 1982. The S&P 500 index lost 27.1 percent in that stretch. You might have been tempted to sell all your shares and forget about stock investing entirely.

But suppose that you had stuck with it, not only through that bear market but through the six others that followed over the next 40 years, including this one.

According to FactSet, your initial investment would have grown 6,600 percent, including reinvested dividends. And if you had funneled money from your paycheck into the market throughout those years and resisted the impulse to sell, your money would have grown splendidly.

Key assumptions

Obviously, I’m making a big assumption: that history will be a rough guide to the future, and that the stock market will rise over the long run.

This is a presupposition, but it isn’t a crazy one. It assumes that while stock prices reflect the whims of human beings over the short term, stocks have an underlying value that eventually dominates.

That value is based on the profits generated by companies as the economy grows. It could well be shrinking now but I’m also assuming that it will keep growing over extended periods, and that market prices will reflect the real values of company shares.

As Benjamin Graham, a Columbia Business School professor and mentor of Warren Buffett, put it, “In the short run, the stock market is a voting machine,” but “in the long run, it is a weighing machine.”

A handful of people have the time, training and talent to study individual companies and stocks, and to make canny investments in them, as Mr. Buffett has managed to do.

For most people, though, it makes more sense to avoid all of that and invest in the total stock market through an index fund that tracks the S&P 500 or another broad list of stocks. If you embrace this approach and do it regularly over many years, you will be engaging in dollar-cost averaging.

Workplace plans

Only about two-thirds of employees in the private sector in the United States have access to workplace retirement plans of any kind, according to the Bureau of Labor Statistics.

Traditional pension plans are increasingly rare. They are being supplanted by 401(k) plans and their cousins, all known as defined contribution plans. Unlike traditional pensions, these plans will pay you nothing unless you invest in them. Essentially, the current pension system is pushing working people to become investors.

Social Security remains the most important pillar of retirement for most Americans, and it is the sole support for many people. Fortunately, it does not demand any investing acumen. Work, pay your taxes and you are entitled to Social Security. This pillar is one that I’m counting on, though its future will depend on Congress, so there are no guarantees.

I think it will, because cutting the benefits of retired people has been politically impossible in the past. But even if Congress somehow fails to bolster Social Security, there will be enough money coming into the system to pay roughly 80 percent of the benefits that are now promised. This is an issue that everyone will want to keep an eye on.

That said, if you are lucky enough to work for a company with a defined contribution plan, try to use it. The money invested in these accounts can supplement your Social Security income one day.

I asked Alicia H. Munnell, the director of the Center for Retirement Research at Boston College, what she recommended.

“Put in at least the amount that will give you the full company match, if there is one,” she said. “Don’t leave any money on the table.”

In other words, she said, if a company will add money to your account, based on your contributions, then invest as much as you need to get the full benefit. Often, the company match stops at 6 percent of your salary; the company might contribute 25 percent or 50 percent of the amount that you put in. Whatever it is, try to take advantage of it.

Target-date funds

The default option in many workplace retirement accounts is a target-date fund, intended as a set-it-and-forget-it investment that you can keep for years.

Designate a likely year for retirement — say, 2070, if you are starting to work now — and the fund will do the rest. It will probably put your money almost entirely in stocks to begin with, and gradually shift your asset allocation to a larger proportion of bonds as you approach retirement.

Professor Munnell said most target-date funds are worthwhile, in her estimation. “Definitely participate,” she said. “Saving automatically like this is the only way saving gets done for most people.”

If you can manage it, do some research. See what is underneath the hood of the target-date plan. Often, what you will find is a variety of index funds, which is great. Check to make sure that the cost, measured as what is known as an expense ratio, is low — meaning, close to zero.

Target-date funds work best within tax-sheltered accounts, including I.R.A.s. I would not use them in an account that is not tax sheltered. As I’ve written, Vanguard’s target-date funds, and those of some other companies, have generated outsize tax bills for many unsuspecting investors. On Thursday, Vanguard reached a $6.25 million settlement with Massachusetts to reimburse investors there, and it faces a class-action suit filed in Pennsylvania.

So stick to tax-sheltered accounts for target-date funds. Use broad stock and bond index funds as core investments elsewhere.

A goal

How much should you be saving? This is a personal issue. If you need the money to pay the bills, do that first. Delay the saving until later if you must.

But it’s good to have a goal and best to start early.

Put aside whatever you can manage. If you are in your 20s, Professor Munnell suggested, aim for a total of 10 percent of your paycheck. That should put you in good shape decades from now. If you are contributing regularly in a workplace plan, this 10 percent can include the money your employer is putting in.

You will be in even better financial shape if you plan on working until at least 70, she said. That will allow you to receive maximum Social Security benefits one day.

Anything beyond that is a bonus.

Start now and you won’t need to make bigger contributions later.

This is a lot of information to take in, so keep investing simple at first, and, maybe, always.

I’d boil it all down this way: Disregard the news about the market, invest regularly in stocks and, eventually, in bonds, through cheap index funds. Take advantage of any tax breaks or employer contributions available at work.

I’ll be here if you have questions.