Bear markets are interesting. On one hand, nobody likes seeing their portfolio’s value drop; on the other hand, bear markets can present many opportunities for investors — especially if time is on your side. Instead of shying away from investing during these times, it can be a chance to find great stocks for much cheaper than their intrinsic value.
Here’s how I’d invest $10,000 in a bear market right now.
You can’t go wrong with the S&P 500
I’m a firm believer that an S&P 500 index fund should be a staple of every investor’s portfolio. Since the S&P 500 tracks the largest 500 companies in the United States by market cap, it’s often used to gauge how well the broader economy and stock market are performing. With an S&P 500 index fund, investors can be confident that they’re essentially receiving instant diversification. For example, the Vanguard S&P 500 ETF (VOO -1.09%) contains 503 companies spanning all 11 main sectors:
- Communication Services (8.90%)
- Consumer Discretionary (10.50%)
- Consumer Staples (7.00%)
- Energy (4.40%)
- Financials (10.80%)
- Health Care (15.20%)
- Industrials (7.80%)
- Information Technology (26.80%)
- Materials (2.60%)
- Real Estate (2.90%)
- Utilities (3.10%)
Of the $10,000, I’d allocate $5,000 — half of what I have to invest — to an S&P 500 index fund.
Look outside the U.S.
No investment portfolio is complete without exposure to non-U.S. stocks. You do yourself a disservice as an investor by only focusing on U.S. companies; there are many great international companies that make for sound investments. As a general rule, you should want around 20% of your portfolio to be in international companies.
I would focus on a total international fund, similar to the Vanguard Total International ETF (VXUS -0.89%), which contains over 7,800 companies in both developed and emerging markets. Developed markets have more stable economies and mature financial systems. Emerging markets don’t have as developed economies as developed markets, but they tend to have more room for growth because of it. A total international fund gives you the best of both worlds.
Of the $10,000, I would allocate $2,000 to an international fund.
Don’t forget about the smaller players
Investors usually gravitate toward large companies because they are more stable, something that can provide some relief during the unstable times of bear markets. Because of their size, however, larger companies tend to have less room for hypergrowth. It’s much easier to double your market cap when you’re valued at $500 million than when your market cap starts reaching $10 billion or more.
You never want to try to time the market or make an investment because you’re anticipating prices rising, but down periods like the one we’re currently experiencing can be a chance to grab beaten-down small-cap and mid-cap stocks at a “discount.” To lessen some of the risks, I’d focus on small-cap and mid-cap funds, similar to the Vanguard Small-Cap ETF (VB -1.34%) and Vanguard Mid-Cap ETF (VO -1.09%), which contain 1,530 and 377 companies, respectively.
Of the $10,000, I’d allocate $1,500 to a small-cap fund and $1,500 to a mid-cap fund.
Don’t invest the lump sum all at once
Dollar-cost averaging is a great investing strategy to use in general, but it can be especially helpful when you have a lump sum available to invest. With dollar-cost averaging, you decide on set intervals to invest and stick to the schedule, regardless of how your stocks are performing during that time. Whether prices are up, down, or stable, the key is to stick to your schedule and invest no matter what.
I’d break the $10,000 down into four scheduled investments of $2,500 over a year, with each investment breaking down as follows:
- Large-cap: $1,250 (S&P 500 index fund)
- International: $500
- Mid-cap: $375
- Small-cap: $375
This will help keep you consistent and prevent you from trying to time the market.
Stefon Walters has positions in Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF, and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF, and Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.