What should you be doing when everyone is panicking about the market going down?
Your ability to stick it out through market swings will vary, depending on where you are in life. If you are retired and currently living off of your investments, you will have a different course of action for down markets. But if you are currently investing for a goal that is years or decades away, like retirement is for Gen X-er's, Millennials, and Zoomers, a down market is a G R E A T time to be socking away money and growing your investment portfolio!
So, should you be putting your money into the stock market when everything is down, and people are in a frenzy?
As long as you don't need that money to live on in the short-term...
Now, if you are already an investor, chances are you’ve seen your account balances drop over the last couple of weeks.
And chances are, it hasn’t been fun to watch.
That is, unless, you have a strategy.
The Long-Term, Buy and Hold Strategy
Let’s break that down. A ‘long-term’ strategy would mean you are investing for something that is years away, with the most common long-term goal being retirement. If you are in your 20’s or 30’s, you have a long time horizon before retirement, with 20, 30 or 40 years before you need to access your investments. The longer your time horizon, the more volatility, or market ups and downs, you can withstand.
When you ‘buy and hold’, that means you aren’t actively trading to make a quick buck. Instead, you buy with the intention to hold onto it for years and years. You understand what you’re investing in, whether it’s an individual stock like Amazon, Facebook or Google, or whether it’s an ETF or mutual fund that holds a piece of many companies in one share.
So how does a long-term, buy and hold strategy change the way we think about down markets?
Well, it turns them into a beautiful buying opportunity.
One of the most well-known rules of investing is to “buy low and sell high”. When markets are down, it creates a great opportunity to act on “buying low”, and lock in lower prices for your investments.
Let’s use a made-up scenario of ‘ABCDE’ stock. If ABCDE normally trades for $20 a share, but in the current market it’s trading for $15 a share, you have a buying opportunity to pick up some shares at a lower price, almost as if it’s on sale! If you were regularly investing in ABCD at $20 a share, buying at $15 not only means you are spending less per share but when the market recovers (and so far, it always has) it also means that you will see higher gains when it does.
Let’s say in 2 months ABCD is back up, and now trading at $22 dollars a share.
The shares you bought at $15 that are now worth $22 grew by 46.6%
The shares bought at $20 and now at $22 grew by 10%.
The more shares you purchase at a lower price, the more potential for future gains! Buying at low times also will help even out your total average cost, which again, means more potential gains for your investments.
Taking advantage of market downturns and investing when prices are lower than normal means you will see higher gains when the market does recover, meaning your money will turn into more money. And who doesn’t love more money for their goals?
When you’re investing, it’s important to look at the big picture.
Here’s a snapshot of the S&P 500 from the last 5 years. We can see that, as a whole, it goes up.
And with the gift of hindsight, we can also see past market downturns, AKA: great buying opportunities.
While we can’t predict where the true bottom actually is while we’re in the midst of it, we can recognize the downturns and take advantage of them, as long as our long-term strategy prevails over short-term fear.
If you're in the position to start taking investing for your future goals more seriously, now is the perfect time.
If you have questions about investing, get in touch! And if you haven’t started saving for your future yet, now looks like a good time to start!
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Hi, I'm Alicia, welcome to Friend of Finance! This site is a way for me to share helpful things I've learned from working in the financial industry, important money things that I probably wouldn't have learned otherwise, and things everyone should know about.