Read on for a quick lesson in why a down market can translate into good news for you and your investment portfolio.
First, let’s cover a market downturn – what it is and how it happens.
In simple terms, stock market downturns are times when the stock market continues to decline.
Market downturns occur when investors and traders react to negative external events like political climate, natural disasters, war, rising interest rates, and more. Investors often become skittish and sell stock en masse, often causing investors to panic and sell, causing
further declines in the market. These external events can cause a recession which might carry on for a few months to a couple of years and typically cause investors to experience lower lows and fewer highs.
A bear market occurs when the market experiences extended price declines. These declines can be caused by a number of issues, ranging from political turmoil, to manufacturing problems, pessimistic investor sentiments, or a generally slow economy. Bear markets can last for as little as a few weeks or months to a couple years.
Why do people get scared and sell when markets go down?
There are a lot of reasons a down market gets people rattled. Watching the value of your portfolio decrease can be unnerving. Maybe you thought the investments you bought would immediately go up. Maybe you haven’t experienced the natural ups and downs of the market and don’t yet understand investments and their nature. But, selling after prices decline is generally a bad idea. It’s almost the exact opposite of how many experienced investors respond when markets are down.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
Bouncing Back: Look at the Data
Remember earlier when we referenced the natural ups and downs of the market? Market data demonstrates that potential long-term positive performance is the result of buying on days when markets are down, as highlighted below.
When there is a rise or expected rise in the stock market, often brought on by generally favorable economic conditions and positive investor sentiment.
Average Market Performance 1 Year After Down Days
December 2011 – February 2021
Source: Bloomberg Finance L.P. Data as of 2/28/2022. Market represented by S&P 500.
Moral of the Story: Keep Investing
While a market downturn can feel deflating, with the right knowledge and a sound investing strategy, it doesn’t have to be a bummer. Think of market down days as investment flash sales. Leverage your buying power so you get more bang for your buck. You can buy more and boost your portfolio and build wealth over time.
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