By: Taylor Richardson, CRPS®, AIF, Financial Advisor
In 2022, the stock market has done something we haven’t seen in quite a while – it’s gone down. By the end of June, the tech-heavy Nasdaq had fallen by 30% and the broad-based S&P 500 was down by over 20%. Both indexes have gone up since then but we’re still in bear market territory and the volatility continues.
People are understandably concerned. Some may be wondering if they should pull money out of the market or even stop investing until things stabilize.
Let’s be clear – you should NOT pull back from investing in the market just because stock prices are down. In fact, the opposite is true – now is a great time to invest more.
Buy When Things are on Sale
When it comes to retail, everybody knows a drop in prices spurs demand. That’s because people like to get a good deal. It’s why so many people are willing to brave the hordes of holiday shoppers on Black Friday. Everything’s marked down! But for some reason, when stock prices go down people tend to have the opposite reaction. A drop in the market drives people away. Whether it’s the herd mentality or brain neurons triggering a fear response, people tend to avoid the market when it’s down.
This is a missed opportunity. By not buying when the price goes down, you don’t get the bump in your retirement savings that comes when prices go back up. Consider how quickly the market rebounded in three of the biggest declines we’ve seen over the last 50 years:
- 2020: The COVID-19 Crash
- Market loss: 34%
- Time to recover: 33 days
- 2008: The Subprime Mortgage Crisis
- S&P 500 loss: 57%
- Time to recover: 17 months
- 1973: The Oil Crisis and Economic Recession
- Market loss: 48%
- Time to recover: 21 months
Don’t Try to Time the Market
While it’s a good idea to invest more when the market is down, I would advise against any strategy that involves buying and selling stocks based on anticipated changes in prices. It’s too difficult to do and it’s easy to miss the big gains.
For example, in 1970, if you had invested $1,000 in the S&P 500 and left it alone for 50 years, your investment would be worth $121,353. But if you tried to time the market and missed the single best performing day, you would have lost $12,595. If you missed the best 25 days, your total investment would have only grown to $26,989.
Stick with Your Investment Plan
It’s much better to stick with a plan of steady investments that allows you to benefit from a rising market over time. The S&P 500 has gained about 10.7% on average annually since it was introduced in 1957. The index has done slightly better than that in the past decade, returning about 14.7% annually. Even though returns can fluctuate from year to year, holding onto investments over time is a winning strategy.
If You’re Close to Retirement – Play it Safe
There is one exception to my recommendation to buy stocks when the market is down, and that’s if you’re getting close to retirement. The strategy only works if you have time for the market to recover. If you plan to retire in the next couple of years, you should consult with your financial planner before doing anything.
For Most Investors, Downturns are an Opportunity
Market downturns are part of investing. For those of us who won’t be retiring for a while, we should see them for what they are – an opportunity to turbo charge retirement savings. Are there companies out there that you believe in, but couldn’t afford to invest in before? Maybe now is your chance.
Nobody can predict the future, so the best plan is to have a plan. That way you’re not reacting to whatever the market does on any one day. If you’d like to discuss your plans for retirement, schedule a call with our team at Engage Wealth Advisors. We can help determine whether the current market offers unexpected opportunities for you to build wealth and reach your retirement goals a little sooner than expected.