The stock market doesn’t always go up. Bear markets happen. They’re an inevitable part of investing. But knowing that doesn’t make it easier to live through. Stock market crashes are emotional — they’re scary and discouraging, and they can cause people to lose confidence in the future.
I’ve been investing for 22 years, ever since I got my first private-sector job with a 401(k) plan. And here’s one thing I wish everyone knew: Bear markets are nothing to fear if you’re a long-term investor with a diversified portfolio and a healthy perspective. Let’s look at a few reasons why bear markets can even be a big opportunity.
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Bear markets mean “stocks are on sale”
Imagine that you wanted to buy a new car, and the price got reduced from $30,000 to $25,000. The car is on sale! Would that make you say, “No thanks, I don’t want to buy the car at the lower price. I’m going to wait for car prices to go back up before I buy.”
Of course not! You’d buy the car at the lower price. You’d take advantage of the sale.
For some reason, stock market investors don’t always bring this same savvy bargain-hunting attitude to buying stocks. If the S&P 500 (^GSPC +0.59%) goes down by 10% or more, many investors get scared and skittish. They think, “Oh no, this stock market must be struggling. I’ll wait to buy more until the stock price recovers.”
If you believed in the future of the economy enough to buy the S&P 500 when the market was at a higher price, why not buy more shares at a lower price when stocks are “on sale”? Bear markets are almost always a buying opportunity. That’s because…
The stock market always bounces back
Some individual stocks can indeed be a bad bet. Not every stock is worth buying just because it’s “cheap.” Not every low-priced stock goes back up. Sometimes a declining share price can be a sign of serious problems with a business, not just a lower-priced stock that’s temporarily “on sale.”
But the broader stock market, as shown by the S&P 500, always recovers. Every time the stock market has crashed, even after the worst moments in modern economic history, like the 1929 crash that led to the Great Depression, the market has recovered.
The S&P 500 has delivered average annual returns of 9.98% since 1928. Through good times and bad, wars, natural disasters, economic shocks, recessions, and pandemics, the stock market has kept on working for long-term investors.
But those strong wealth-building returns don’t usually go to short-term speculators or day traders. Instead, they tend to go to long-term investors who keep buying stocks during downturns and hold them for five to 10 years or more. During the past 16 years, the Vanguard S&P 500 ETF (VOO +0.61%) has delivered annualized returns of about 15%.
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There’s rarely a bad time to buy the S&P 500
Investing in the stock market can make some people nervous: “What if my stocks go down? What if I lose money?”
Here’s the thing: If you’re truly able to leave that money alone, leave it invested, and let it sit in your brokerage account for five to 10 years or more, you don’t need to worry too much.
In the long run, even if you buy stocks right at the start of a bear market, there’s no such thing as a “bad time” to buy stocks. Even if share prices plummet tomorrow, owning the S&P 500 with low-cost index funds like VOO is likely to be one of the best possible ways to invest your money.
In the short run, sometimes bonds and commodities, gold, or alternative investments beat stocks. But in the long run, I believe that owning shares in publicly traded companies’ future earnings is one of the best ways for most people to grow their money.
