If you’ve tuned into the financial news lately, it’s all bad. And with headlines like “stocks have more to fall” and “coming recession could be the biggest ever,” no one would blame you for panicking.
But you don’t have to.
In fact, when the sky is falling in the financial world, investing can be one of the best ways to boost your bank account. Here are six reasons why.
You can buy stocks for less
If you’re not retired yet, you’re probably still investing through your work 401(k) or in your own personal IRA. And while seeing the balance fall is never fun, it’s actually a great opportunity to buy while stocks are on sale.
If you’re investing in good companies with a long-term track record, short-term volatility presents an opportunity. As investors sell off their holdings and prices plummet, you can scoop up low-priced stocks and index funds at prices not seen in years.
As a bonus, when you buy stocks or funds for less, you’re lowering your overall investment cost. This is a magic of dollar-cost averaging into the market and allows you to buy when stocks are high as well as low.
Over time, your average purchase price is much better than if you only bought when things were good, and your long-term returns will be better than only buying when the market is hot.
Stock market drops are normal
Seeing red in the financial markets day after day, week after week can start to wear on your investing conviction. Especially after investing during an unprecedented rally since 2009, over a decade of (mostly) positive returns, and many years returning over 20%.
But instead of panicking while the market is correcting, it’s important to zoom out and look at the big picture. For example, since the 1950s, the average bear market (a drop of 20% or more) only lasts 11 months. And the average decline in those markets is about 30%.
The stock market has always recovered and produced all-time high values after every bear market and recession. While some market crashes take longer to bounce back than others, over the long term, the market continues to go up.
If you’re a long-term investor, it’s important to remember your investing time horizon. If you can weather the storm and continue investing during the volatility, you have a much better chance of coming out wealthier on the other side of this bear market.
The market still returns 10% on average (including crashes)
The stock market has returned (on average) about 10% per year over the past 100 years. This includes the following market crashes:
- The Great Depression (1929) – 89% drop
- The recession of 1937-1938 – 40% drop
- Flash Crash (1962) – 20% drop
- Black Monday (1987) – 22.6% (in a single day)
- Dot-Com Bubble (2000-2001) – 70% drop (NASDAQ)
- Great Recession (2008) – 51% drop
- 2020 Crash – 37% drop
These massive financial crises are all included in the 10% market average returns, with much of those returns coming in the aftermath of the crashes.
So yes, markets can (and do) drop significantly, but the average returns make holding on during times of volatility worth it.
You still own the same number of shares
In a down market, it’s easy to start freaking out about how much money you’ve “lost,” but the truth is, you haven’t lost anything if you don’t sell. You still own the same amount of shares as you did before the market started dropping.
One of the worst things you can do is to sell while the market is falling since timing the market is extremely difficult. You have to be right twice: Once when you sell at a higher price, and again when you buy back in at a lower price.
If you don’t sell anything and let the market recover, you won’t lose any money. You might increase your returns if you continue investing while stocks are falling.
So the next time someone says “how much have you lost in this market?” you can say, “nothing.”
The S&P 500 is not as down as Netflix (or Bitcoin)
Netflix (NFLX) stock has dropped over 60% in 2022 alone. And several other individual stocks have dropped even more). For investors who own a large number of tech stocks, their portfolios are looking pretty grim.
Crypto investors are hurting just as badly. Bitcoin (BTC), the largest cryptocurrency by market capitalization, is down about 60% for the year, and other cryptocurrencies are down as much as 90% or more.
But for passive investors, things aren’t looking so bad.
The S&P; 500 index is only down around 25% for the year (as of October 2022). And while bonds are hurting due to inflation and interest rate hikes, the Vanguard Total Bond Market Fund (BND) is only down about 16%.
This goes to show that diversification is key, and concentrating your investment portfolio into a few stocks can be dangerous. Investing in broad-based index funds containing thousands of companies is a great way to spread your risk across the whole market.
This can lower the overall volatility of your portfolio and help you avoid the scary 80% drops that can come with investing in individual companies.
Warren Buffett says to ignore the market when it’s down
When the investing world is in a panic, it’s always a great idea to ask yourself, “What would Warren Buffett do?” Considered one of the world’s best investors, Warren Buffett spoke a few years ago on market volatility and how to handle a market that is dropping.
“I would tell them don’t watch the market closely,” said Buffett in a 2016 interview. “The money is made in investments by investing, and by owning good companies for long periods of time.”
Warren Buffett also says that trying to day-trade stocks and time the market is not a great strategy, and those who do are “not going to have very good results.”
If you’re invested in good companies or in index funds that hold high-quality companies, Buffett recommends ignoring the market when it goes down.
His investment philosophy is that of a long-term investor, and short-term volatility is simply noise. As someone whose holding company manages hundreds of billions of dollars for investors, Buffett needs to stay calm when market values drop significantly.
So turn off the financial news, stop looking at your portfolio every five minutes, and stop Googling the words “stock market.” When in doubt, just do what Warren Buffett does.
In 2022, the stock market has been a roller-coaster, with significant drops and tons of negative financial news coming out daily. From inflation and oil prices to interest rates and wars, it seems like there’s no end in sight.
The stock market will always have corrections. The economy will always have recessions. And there is always a reason to panic about your investments.
But if you zoom out and look at the last 100 years of stock market history, things become a bit more clear. The market continues to go up over long periods. And investors who “buy and hold good companies” come out on top, as the Oracle of Omaha made clear.
One of the simplest ways to avoid money stress is to just remember that things will get better.
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