For the last 90 years, the S&P 500 has an average return of close to 10%1. The S&P 500 is an index made of the 500 largest companies in the United States. These days people expect the stock markets to always go up and to increase in value. What if they go down? Did you realize that in 29 of the past 90 years, you would have lost money for the year if you had been in the S&P 500? The reality is that in more than 25% of the time the average investor is going to lose money in the stock markets. Yes, that’s right, statistically you are going to lose money in one out of every four years. This is normal.
What do you do when the markets go down? None of us like to lose, except weight when we step on the scales. A common reaction to seeing your investments go down in value is to think that there is something wrong and to make a correction by pulling your money out of the markets. This would be selling at the bottom. This is a sure recipe for losing money in the stock market.
You have to understand that your shares in the stock market get their price through people’s evaluation. You could own 100 shares of the absolute best company in the world, but if some outside event occurs such as a major earthquake on Mars, some people may decide that the best company in the world is worth less and the value of your 100 shares would go down. Now stop and pause, would you still own the same number of shares? Yes. Is the best company in the world any different because of a major earthquake on Mars?
Probably not. So really nothing has changed with your 100 shares, except some people decided that they were worth less money. Since your shares lost value simply because someone values them less, chances are those 100 shares will come back to the original value and go higher once people understand that a major earthquake on Mars does not affect the best company in the world. This type of thing happens often in the stock market. A group of solid companies will suddenly lose value because of some outside event that doesn’t directly affect them. It would be short-sighted to sell them because their value had fallen when nothing had changed with those companies.
There are times when an event will cause most of the stock market to lose value, but in over 90 years of history the stock market has always regained its losses. While we can’t predict the future, we are able to see that in the past it was important to stay invested in downtimes, because the stock market has always come back to new highs.
Next time the markets go down and I guarantee they will at some point, consider investing more. When the markets go down all the companies are on sale. You can get more shares for less money. You’ll have to be prepared to hold those shares because the average recovery time when the markets lose 20-40% is 14 months2. It took over four years to recover from the Great Depression3. Still if you keep your investments for four to five years, then historically you’ve had time to see a positive return on your shares.
If you decide to buy more when the stock market is down, can you pick the best companies poised for recovery? Picking individual companies is difficult. In fact, almost all of the so-called stock experts actually have a lower return than the S&P 500 annual return4. What is the S&P 500 again, it is the 500 largest companies in the United States. The point being made here is that diversity in stock investments is a proven strategy. This is why Sommers Financial Management always has a wide variety of share holdings in every portfolio.
In review, the stock market will go down, but that is okay because in the past it has 100% of the time always come back to new highs. Holding on to your investments during down times will allow you to avoid losses over time and be ready to participate in highs. Consider investing more when markets are low and again be prepared to wait for the recovery. And lastly, make sure you have a wide range of holdings, diversity adds stability to your investments.
1 Reed, Eric, “What is the S&P 500 average annual return?”, Yahoo Finance, Nov. 21, 2019, https://www.yahoo.com/now/p-500-average-annual-return-231601665.html
2 Guggenheim, “Putting Pullbacks in Perspective”, April 2021, https://www.guggenheiminvestments.com/mutual-funds/resources/crucial-conversations/putting-pullbacks-in-perspective#:~:text=Declines%20in%20the%20S%26P%20500%C2%AE%20(Since%2012.31,1945)&text=In%20contrast%2C%20pullbacks%20of%2040,compromise%20an%20investor's%20financial%20plan.
3 Kaplan, Paul, “In Long History of Market Crashes, Coronavirus Crash Was the Shortest”, Morningstar, Mar. 9, 2021, https://www.morningstar.com/articles/1028407/in-long-history-of-market-crashes-coronavirus-crash-was-the-shortest
4 Perry, Mark J., More evidence that it’s really hard to ‘beat the market’ over 95% of financial professionals can’t do it”, Oct. 2018, AEI, https://www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-95-of-finance-professionals-cant-do-it/