A volatile stock market can be worrisome, especially for new investors. When the value of your portfolio has dropped, you may be unsure about continuing to put in more money. You might even want to cut bait and sell your investments entirely.
While this is a normal reaction to a down market, it's one that every investor needs to learn how to get past. Experienced investors know that it's important to continue investing when the market is down. In fact, it's one of the best money moves you can make.
Why you should invest when the market is down
Stocks, and the stock market as a whole, go through ups and downs. These are often due to the economy and not necessarily related to a stock's underlying value.
For example, during the Great Recession, stock prices dropped by about 50% between late 2007 and early 2009. That's a stressful situation for any investor. But many of those stocks were still quality investments that recovered and became even more valuable. The investors who buy during down periods are able to get a lower price, and eventually make even more money if the stock recovers.
Ramit Sethi, who stars in How to Get Rich on Netflix, recently shared a smart reason why you should continue to invest when the market is down. As he put it, "When the price of something you want goes down...you're happy about it!" If a product you love went on sale, you'd probably take the opportunity to buy it at that lower price.
It works the same way with investing in stocks. If you believe a stock is a good long-term investment, you should invest in it regularly. If the price goes down, don't look at it as a bad thing. Look at it as an opportunity to get more for your money.
Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall. And you definitely shouldn't panic sell your investments. Once you sell, you lock in your losses, and you'll miss out if those investments bounce back.
How to choose quality long-term investments
The key to making this work is to choose investments that you believe will be successful over the long haul. That way, you can continue to invest with confidence no matter what the market does.
Despite what some people believe, your investments don't need to be individual stocks that you pick yourself. They certainly can be, if you want to build your own portfolio. But there's also a much simpler option that can be just as effective -- investment funds. These put your money in a large number of stocks, bonds, or both, giving you a diverse portfolio in as little as one investment. Options include:
To give you a firsthand example, I've been investing in a total stock market mutual fund for years. It distributes my investment across the entire U.S. stock market. During the time I've invested in it, the price has fluctuated quite a bit.
No matter the price, I've put money in it every month. I know that historically, the stock market has produced an average annual return of about 10% (before inflation, that is). Even though nothing's guaranteed with investing, I'm reasonably confident that over the long term, the U.S. stock market will keep going up. So, when the market is down, I just look at it like I'm getting more for my money the next time I invest.
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FAQs
Look at it as an opportunity to get more for your money. Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall.
Should you still invest when the market is down? ›
If you're asking, "Is now a good time to buy a stock?" consider that it's always a good time to invest when you find a security you've determined is undervalued by the rest of the market. On the other hand, you'll likely find more opportunities to buy shares of undervalued companies during a broad market decline.
What is the safest investment if the stock market crashes? ›
If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.
What to buy when the market is down? ›
Buy More Stocks, if you can
If you have saved enough and have other assets that generate income for you, this is the right time to buy more stocks. The reason for this is simple, a stock market crash signifies all the prices are down and this is the perfect opportunity to buy low and sell high.
Should I invest in mutual funds when market is down? ›
But ask any market expert and they'd agree that this is not the time to exit your mutual fund investments. In fact, investors who are optimistic about the market would advise you to invest more. Let us have a look at some reasons why you should remain invested in mutual funds.
What does Dave Ramsey say about investing in the stock market? ›
We recommend a buy-and-hold strategy when it comes to investing. The stock market is like a roller coaster. There are going to be ups and there are going to be downs—the only people who get hurt are the ones who try to jump off before the ride is over.
When should you not invest? ›
You're Not Financially Ready to Invest.
If you have debt, especially credit card debt, or really any other personal debt that has a higher interest rate.
Do I lose all my money if the stock market crashes? ›
When the stock market declines, the market value of your stock investment can decline as well. However, because you still own your shares (if you didn't sell them), that value can move back into positive territory when the market changes direction and heads back up. So, you may lose value, but that can be temporary.
Can I lose my 401k if the market crashes? ›
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
Is it smart to invest when the stock market crashes? ›
There is nothing that will definitely go up if the stock market crashes. Interest bearing investments such as money market funds will continue to earn interest. Bonds may hold their value or increase, and individual bonds including Treasury's will continue to earn interest.
Panicking when your portfolio decreases drastically and selling is the worst thing to do. Avoid such a mistake by understanding how the market works and setting a personal risk tolerance. Experiment with a stock simulator to identify your tolerance for risk and insure against losses with diversification.
At what age should you get out of the stock market? ›
Experts with the Motley Fool suggest allocating an even higher percentage to stocks until at least age 50 since 50-year-olds still have more than a decade until retirement to ride out any market volatility.
How do you profit from a recession? ›
What businesses are profitable in a recession? Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.
What happens to mutual funds when market crashes? ›
However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.
Should I sell or hold my mutual funds now? ›
However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
What is the best day of the week to buy mutual funds? ›
Historically, Mondays have often been considered a good day to buy stocks, primarily due to the 'Weekend Effect' or 'Monday Effect'.
Is this the right time to invest in stock market? ›
There is no better time to start investing. It is very difficult to time the markets and although the markets are due for a correction, it would not be wise to wait further. Also, when it comes to SIPs, there is not much merit in timing the markets. We would suggest you invest in different mutual fund categories.
What should you do when stocks go down? ›
What to do during a stock market crash
- Know what you own — and why. A fear-driven reaction to a temporary slump isn't a good reason to dump an investment. ...
- Trust in diversification. ...
- Consider buying the dip. ...
- Think about getting a second opinion. ...
- Focus on the long term. ...
- Take advantage where you can.
You shouldn't be. While many investors may feel nervous about the potential for a fall, our analysis of stock market returns since 1926 shows that investing at a new high can be profitable.
