You've probably heard it before: When it comes to investing in stocks, it pays to stay the course. That's easy to do when the market is going up—like it has so far in 2019—but what about when it drops?
While no one can predict what the market will do next, more than a century's worth of history has taught us two things. 1) There will be downturns. 2) That does not mean you should panic-sell or stop investing.
And how do we know that?
Because despite those downturns, the U.S. stock market has gone up significantly over time, as people continue to invest in order to grow wealth. The more we support U.S. companies by buying their stock, the more those businesses can grow, further benefiting shareholders. It’s like a happy (long-term) loop.
The market doesn’t climb in straight lines, though. In the short term, any number of factors—from political drama to rising interest rates—can shake investors’ confidence and cause stock prices to drop. According to Deutsche Bank analyst David Bianco, even dips of 5 percent are so common that they've happened nearly every year since 1960. And full-blown "corrections" of 10 percent or more happen about every year or two.
But in the long term, investor confidence has remained positive—which is why every downturn in history has ended in an upturn.
How long do those corrections usually last?
Anywhere from a few weeks to more than a year (though that’s rare). Historically, the average correction lasts 71.6 trading days, or about three months. Of course, some corrections turn into bear markets, in which the major stock market indexes fall 20 percent or more from their highs for a sustained period.
Bear markets are less common than corrections, occurring, on average, once every few years. They typically last less than a year, though some can last longer. If you’d invested in an S&P 500 index ETF on January 2, 2008 (the first trading day of the year), for example—in the midst of the global financial crisis and just before the onset of the Great Recession—you’d have had to wait till 2012 to see a full recovery.
That said, if instead of withdrawing your money, you’d left it alone, and reinvested any dividends, your balance would have grown by an estimated 150 percent a decade later. In other words, it really does pay to be a long-term investor.
As opposed to...?
Trying to time the market, or going in and out of the stock market frequently. For one, a lot of stock growth happens in spurts. Perfectly timing these swings is nearly impossible.
For example, those who invest in S&P 500 index funds have enjoyed about 8 percent annual returns in recent decades. But investors who missed the top 10 days of trading during a recent 20-year stretch would have seen their returns fall by almost half, to 4.5 percent, according to one Schwab analysis.
What are the chances of timing that right?
Let's say the odds are very much stacked against you. A safer bet? Stick it out—knowing that there will be down days, or months. Overreacting and pulling out your money is a surefire way to lock in your losses.
This post was updated in February 2019.
August 7, 2017