The S&P 500 index is down more than 12 percent YTD as of April 27. While that downturn is only favorable for short sellers and put options traders, it can still be beneficial for long-term investors. By remaining invested in the stock market — even if it means adjusting your portfolio — you’re setting yourself up for future success.
Here’s why and how to stay invested (and keep investing) in the stock market, even in an unsavory downturn.
There's a likelihood of long-term investment profits.
The amount of time that you have to invest is called your “time horizon.” The longer your time horizon, the likelier you are to see profits. No stock market investment is guaranteed — that’s the innate risk of investing. However, there are ways to mitigate that risk, and one such way is by increasing your time horizon.
Investors who stay invested in the stock market during downturns generally see better returns than if they had exited the market and reentered when conditions improved. Investors who stayed in the stock market for any 15-year consecutive period from 1926–2018 had a positive return for 99 percent of the time they were invested, according to Ellevest.
Despite volatility, the stock market has a history of recovery.
A stock market recovery study from MFS Investment Management says, “Historically, markets have posted strong long-term gains following declines.”
The stock market fell 86 percent during the Great Depression, but recovered 263 percent above pre-crash levels within five years of the end of the bear market.
The stock market fell 34 percent during the Black Monday downturn in 1987 but reached 335 percent above pre-downturn levels within 10 years of the end of the bear market.
The stock market also crashed 34 percent during the COVID-19 pandemic but recovered 75 percent from pre-pandemic levels within one year. The current downturn has shaved some of that, but history suggests it won’t last, even if a recession hits the U.S. economy at some point.
Are stocks "on sale" in a downturn?
If you’re planning on staying invested in the stock market during tough times, consider this. Not only is it beneficial to remain invested through the thick of things, but it’s also a good idea to regularly invest.
As stock prices lower in what’s called a “bear market,” long-term investors essentially have the opportunity to get certain stocks on sale.
How do you know which stocks will recover? You don’t have a firm grasp on this. However, diversification — investing in different kinds of assets from different sectors — bolsters your chances of turning a profit. Blue-chip stocks and other legacy stocks that have proven themselves in a long-term market may also be a good option when it comes to investing in a downturn.
Readjust your portfolio as needed — but beware of emotional selling.
The key is to continue investing in the stock market during a volatile economic recovery. However, that doesn’t mean you can’t sell stocks. Some stocks are losers with or without a bear market. Don’t be afraid to readjust your portfolio as needed, but try to keep emotions from leading the way. If your investment is down now (or not as high as you would like it to be), refer to your strategy and see what reason says.