Investing During a Market Downturn
The stock market is down. In times like these, it can be tempting to make gut decisions based on emotion. Instead, now is the time to reflect on your long-term goals and why you started investing in the first place.
Nobody likes to see their return take a dip. But there can be an upside to a down market. You know how they say “buy low, sell high”? Well, right now it’s low.
That’s why cashing out all of your investments isn’t a great plan. You’ll lock in your losses, and when the markets recover — which historically, they always do — you’ll miss out on those gains.
But beyond that, if you’re a long-term investor, times like these can present an opportunity.
What is a market cycle? (And what’s happening right now?)
Markets go up. Markets go down. That’s called volatility, and it’s part of a normal market cycle.
We have a pretty good idea of what’s contributing to market volatility right now (the Coronavirus’ impact on the economy, and an oil price war). But in the bigger picture, you could argue that the market is down because it almost had nowhere to go but down.
We were riding high for so long, on an 10-year long bull run, the longest in history. Analysts had warned for years that many stocks were overpriced, and yet they kept going up.
Now, based on the current climate, fear is up, confidence is down and the stock market is moving on those emotions. We can’t predict when it will recover, but historically the market always trends upwards over the long run.
Investing for the long-term, even when the market is down
When the market is bouncing up and down, or mostly down, fear can take over. But if you let emotion rule your decision-making process, you can make decisions like cashing out when your investments are at their lowest.
That’s the opposite of “buy low, sell high”. It’s “buy high, sell low”.
Mistakes like these can destroy decades worth of returns. That’s because bull markets often charge hot on the heels of bear markets, with a significant amount of the market recovery happening in the first few months of a rally.
In the graph below, you can see how staying the course can pay off. Over the past 20 years, six of the 10 best days in the market occurred within just two weeks of the 10 worst days, according to J.P. Morgan.
How to invest when the market is down
Here are three things long-term investors can consider when the market is down to minimize their losses, and maximize their potential for gains:
1. Stay invested. Don’t cash out.
As long as you’re still invested, you technically haven’t lost anything, because your depressed investment can still go back up. But when you move to cash, it’s game over. You’ve just locked in your loss. If the market recovers, which historically it always has, you’ll miss out.
2. Keep contributing to your investments.
Downturns can present an opportunity for long-term investors looking to press their advantage and buy while the market is low. I know what you’re thinking: “what if the market goes down even more?”
That’s always a possibility. We all remember what happened in 2008. The S&P 500 fell over 38 percent, which was its worst yearly percentage loss in history. For investors, it was a time of panic. And yet, even investors who bought into the market before the financial crisis and held would have posted solid returns a decade later. According to Morningstar data, if an investor was to invest $100,000 in the S&P 500 on June 1, 2008, they would have lost $51,000 by March 9, 2009, at the bottom of the market. However, by the end of 2019 their investment would be worth $295,000.
So, the market could go down even more. It could also go up. But your decision to invest now should be based on your goals, and the opportunity to gain over the long-term. It shouldn’t be based on a desire for short-term gains, or your best guess on what the market will do from here.
3. Don’t try to time the market.
Timing the market means you’re waiting for the perfect moment to buy in, not just a good moment. That’s really, really hard to predict, even for professional investment managers who spend their careers trying to understand the market. It’s much harder for regular investors.
Don’t let perfect timing be the enemy of good timing when it comes to your money.
The bottom line? Amid stock market panic, it’s critical to use logic, reflect on your financial goals, and think-long term. That’s how you’ll weather the storm.
¹ This graph is a hypothetical illustration of the S&P 500 Total Return Index. It includes reinvested dividends, but does not account for fees or actual trading and liquidity constraints. For further information, please see slide 43 of the J.P. Morgan Asset Management analysis.
The performance provided is for informational purposes only and is not to be considered as investment advice. Portfolio performance is not guaranteed. The value of your investment can go down, up and change frequently. Past performance is not indicative of future returns. You should always consider, in any investment decision, your investment objectives, needs, circumstances, restrictions, tolerance for risk, financial goals and investment time frame.