It’s no secret that the stock market can be unpredictable. When it goes down, it can be tempting for investors to panic and sell their investments or stop adding to them, in an attempt to minimize losses. However, these emotional reactions to short-term market fluctuations are more likely to harm than help your investment performance.
So, how do you know you’re making the right decisions for your future? You can start with understanding the historical context behind stock market downturns, and then explore your options during these periods to get the most out of them.
Stock market declines are very common
There are many notable examples throughout history that illustrate how markets can dip in the short term but see substantial recovery over longer time periods.
– 1929 Great Depression: The Dow Jones Industrial Average (DJIA) fell by 89%. The market eventually recovered, with the DJIA regaining its pre-Depression levels by 1954.
– 2008 Global Financial Crisis: The market crashed and caused a worldwide economic downturn. Once again, the market eventually recovered, and had surpassed its pre-crisis levels by 2013.
Years with large stock market declines can even have positive returns for investors by the end of the year. For example, U.S. stocks entered a bear market due to the Covid-19 pandemic and dipped as much as 34.3%. Those who remained invested through this crisis saw a positive total return of 24.1% by the end of 2020 as they benefitted from the subsequent market recovery.
As per these historical examples, those who stayed invested and rode out periods of volatility came out on top at the end.
The market has historically gone up in the long run
History has shown that the stock market has trended upwards over time. In fact, if you had invested $10,000 in a low-cost S&P 500 index fund in 1980, your investment would have grown to over $750,000 by 2018.
Many factors have contributed to this historical market growth, including advancing technology and population growth. These variables allow companies to experience what is called “compound growth”, which considers a company’s increased value along with its gains in previous years, causing them to grow faster over time. The more these individual companies and industries thrive, the more their relevant stock markets expand in the long run.
How can you benefit from market downturns?
You can also benefit even more by seeing downturns as an opportunity to buy further investments “on sale” at lower prices. Over time, this allows you to benefit once the market goes up again and minimize losses you would have experienced had you bought your investments when prices were high. Strategies such as Dollar-Cost Averaging can help you invest at regular intervals, without stressing about timing the market.
Stay at ease with your investments
All in all, when the market goes down, it is critical to stay focused on your long-term objectives and avoid making emotional investment decisions. Keep your mindset balanced by remembering what is within your control when investing and what the historical context is. This will allow you to stay on track with your strategy and potentially take advantage of market downturns to achieve your long-term financial goals.