Notice the market moves lately? Are you feeling like the bottom is falling out? Does this downturn make you want to hibernate until the market bounces back? That’s all understandable.
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.
When markets are down, or we’re experiencing a bear market, investors, like you, shouldn’t panic. In fact, if you’re invested for the long-term you might find a reason to be positive because prices to buy more investments are now cheaper. We’re happy to buy cars, clothes and other items on sale. What about stocks, including ETFs, and other investments? When their prices dip during a down market, they go “on sale” and investors can buy more for their money. Check the data below to see how buying after a market decline may generate improved long-term results.
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”
The reality is that markets move based on long-term growth of companies, as well as short-term changes in expectations. Changes in expectations can be emotional swings from optimism when markets get overpriced to pessimism, when markets decline. Over the last 40 years, the market (S&P 500) has generated an annualized return of 12%. Timing the market or buying the dip is very difficult, even for investment professionals. However, by remaining disciplined, sticking to your investment plan, and continuing to invest even on days the market is down, you may have the opportunity to “buy on sale.”
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
While returns for all days averaged north of 12%, on days when the market was down between 0% and 1%, the subsequent 12-month returns exceeded 14% on average. When we look at returns one year later for days the market was down between 1% and 2%, returns exceeded 18% on average. And when the market experienced a dip of more than 2%, the average returns one year later were beyond 28% on average.
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.
*The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. Beanstox does not provide tax or legal advice. Please contact your legal or tax adviser for related questions.