This could be the best strategy to deploy in a bear market
SShould you buy stocks now or wait for a rally? This is a question many investors are probably asking themselves right now in the midst of this bear market. No one wants to buy a stock only to see it continue to fall for weeks, months, or even years. But at the same time, you’ll never know for sure when the bottom was hit until long after a stock rallies.
There is a potential solution for investors to consider here – one that could balance these two risks.
Cost average makes a lot of sense
Averaging is a strategy of investing equal amounts in a stock at regular intervals. By doing this, you can avoid making a big purchase today only to cringe at seeing the stock value drop further next month.
Instead, you can spread the total amount of what you plan to invest over several months, a year, or even longer. Then, if the stock price goes down, your average cost goes down as you make subsequent purchases. At the same time, if the markets recover and the value of the stock increases, you benefit from these gains.
Here’s how it works
Let’s take stock as Teladoc Health (NYSE: TDOC) for example. It is a leader in the telehealth industry, and the sector is growing; Fortune Business Insights analysts predict it will grow at a compound annual growth rate of 32.1% through 2028, when it will reach over $636 billion. Given the potential, a title like Teladoc could be a solid long-term buy.
However, shares of the telehealth giant have fallen sharply this year, down 61% while the S&P500 decreased by only 21%. Investors may be hesitant to take a chance on the stock given its slow growth rate. But if the telehealth market generates the gains expected by analysts, then Teladoc should rank among the best. growth stock own for the long term.
If you invested $1,000 in the stock at the start of the year, your investment would be worth about $390 right now. But if, instead, you planned to buy about $167 worth of the stock every month for the first six months of the year, here’s what your average would look like:
For simplicity, the chart above assumes that a purchase is made on the first trading day of the month at that day’s closing price.
At the beginning of June, your average cost would be just under $56. Your total investment would still be around $1,000, but now, with Teladoc shares trading at around $35, you’d be down 37% from 61%. Your investment would be worth $630 compared to $390 if you had only made one large investment at the start of the year. It’s still a loss, but much smaller – and hopefully temporary – given the outlook for the sector.
It doesn’t always work that way, but averaging can be a good strategy when a stock has good fundamentals and promising growth prospects.
Should you use average cost?
Using cost averaging can be a great way to stay invested in the stock market while resisting the temptation to try to time the market. If you have a quality investment that you want to buy and hold, this is a strategy that can work well for you and lead to great gains down the road.
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