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 (NYSEMKT: VOO) contains 503 companies spanning all 11 main sectors:
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- 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 (NASDAQ: VXUS), 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 …….