When the stock market tumbles, your first instinct may be to sell off and flee to the safety of cash. That’s a bad idea, especially if you’re a long-term investor.
Time and again, the market has recovered after each pullback, eventually rising to its former highs and well beyond. Panic sellers during the March 2020 crash might have missed out on the worst days of the market, but they would likely have missed the remarkable market rally that followed.
The market’s best days typically follow the largest drops. And given the difficulty in timing the right moment to get in and out of the market – even for experienced investors – the smarter option is to simply stay invested through the ups and downs.
Stocks do not keep going up all the time. After months of gains this year, a pullback is natural but it doesn’t mean a correction or bear market is imminent. Despite the September slump, the S&P 500 is still up nearly 15% this year.
For long-term investors, the recent sell-off may even be an opportunity to add selective exposures to your portfolios.
With many stocks coming off from their recent highs, now could be a chance to invest in high-quality assets at more attractive prices – before they continue their upwards trajectory once again.
There’s a famous expression from the legendary Warren Buffet that says: “Be greedy when others are fearful, and fearful when others are greedy”. As other investors flee, his mantra suggests that a market decline could be a good time to cash in on lower equity prices.
As to what opportunities are available, consider long-term fundamentals. For instance, Big Tech companies recently experienced a sharp sell-off as concerns around a potential rate hike grew.
But given the quality balance sheets and sustained growth potential of many major tech and internet stocks like Apple, Microsoft, and Amazon, the pullback could have been a buying opportunity. If you believe that over the next three to five years, growth companies will continue to outperform, then short-term sell-offs should not alter your conviction.
Likewise, for China equities. Despite worries over China’s regulatory clampdowns, the fundamental long-term strength of the Chinese economy remains unchanged. In fact, pent-up demand and excess household savings in China could drive 8 – 10% growth in domestic consumption over the next two years, according to independent research firm Alpine Macro.
What if the market falls further?
For a balanced perspective, let’s consider what might happen if the market dips even more right after you invest now. Simply put, your returns will be affected – but not for very long.
It only took about 2 years to breakeven after the 2008 financial crisis. The March 2020 bear market was over in a matter of months. For investors with a long time horizon, the downside of a worst-case scenario isn’t as scary as it seems.
Keep in mind the above data point illustrates investing at a stock market high right before a bear market, which is defined as a market decline by more than 20%. The recent selloff, while unsettling, was nowhere near that magnitude.
The truth is, nobody knows whether this is the absolute bottom of the market. The market may very well rally from this point on. There’s just no way to predict what is going to happen next.
What we do know is that, the longer you stay invested, the better your return prospects are. According to research done by Capital Group, the 10-year returns for the S&P 500 have been negative just 6% of the time since 1929.
As the chart above shows, the longer your investment period, the greater your chances of a positive outcome. In fact, if you can hold your investments for a 20-year period, you would have historically come out ahead.
A strategy to consider
An effective strategy for long-term investors to take advantage of discounted stock prices is by dollar cost averaging (DCA).
In essence, you invest a set amount into the market at regular intervals, say $1,000 every month. This way, you can capitalise on lower prices now while avoiding the risk of buying all at once ahead of another market drop.
This method also helps to take emotions out of your investing. By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or time the market.
Whichever strategy you prefer to capitalise on the sell-off, it’s important to keep a long-term perspective with your investments. Over time, historical data shows that if you stay invested, your money should grow.