Why Buying Stocks After a Market Drop can be a Smart Move
When the stock market drops by 10% or more, it's natural to feel worried. However, instead of selling your investments, there are good reasons to consider buying more.
When the stock market drops by 10% or more, it's natural to feel worried. However, instead of selling your investments, there are good reasons to consider buying more. Here's why buying stocks after a drop can be a smart move, even if you're new to investing:
5 Reasons to Buy Stocks After a Drop
1. Market Ups and Downs Are Normal
The stock market naturally goes up and down. These changes can be caused by various factors, like economic news or world events. While these drops can be unsettling, the market has historically bounced back. For example, after a 10% drop, the market often recovers in about four months¹.
2. Long-Term Growth
Over time, the stock market has generally gone up, despite occasional drops. For example, the S&P 500 index has delivered an average annual return of around 11.6% from 1980 to 2020². By buying stocks during market downturns, you can benefit from future market recoveries and long-term growth.
3. Buying at Lower Prices
When the market drops, it's like a sale on stocks. Buying stocks at these lower prices means you can get more shares for your money. This is called "buying the dip." For instance, during the early 2020 COVID-19 pandemic, many stocks dropped significantly, but those who bought during the downturn generally saw gains as the market recovered.
4. Building Wealth Over Time
Consistently investing, even during downturns, can build wealth over time. For example, if you invested $400 a month in the S&P 500 starting in January 2000, your investment could have grown significantly by 2024, even with market ups and downs. Assuming an average annual return of approximately 7.52%, your total contributions of $118,000 could grow to over $330,000³.
5. Rebalancing and Diversifying
When the market drops, it can be a good time to buy different types of stocks or sectors that are undervalued. This helps diversify your investment portfolio and reduce risk. Beanstox makes it easy to invest using ETFs.
Conclusion
Market drops can feel scary, especially if you're new to investing. But they can also be opportunities to buy quality stocks at lower prices. Instead of selling in a panic, consider buying more stocks to take advantage of potential future gains as the market goes back up. By staying focused on long-term growth and consistently investing, you can build wealth over time and achieve your financial goals. You can download Beanstox and start investing today with a Power Savings, Stocks 500 or Wealth Builder investment account.
Footnotes:
1. Here's how long stock market corrections last and how bad they can get
2. Source: Bloomberg Finance LP. Data as of 7/31/2024
3. Source: Bloomberg Finance LP. Period 12/31/1999 – 7/31/2024
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