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Stocks Off 10%: Thoughts From The Motley Fool's CIO

By Andy Cross - Updated Feb 28, 2020 at 4:53PM

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It takes courage to hold on and keep investing in turbulent markets. We're here to help you find and maintain that courage.

This was originally published on Feb. 27, 2020.

Foolish Investors,

With today's 4% drop, U.S. stocks have now fallen 12% in a week, wiping out all of this year's gains and taking us back to the levels of last autumn. Many of our favorite businesses, and ones we know many of you own along with us, are down even more than that.

It's not only the amount --- 12% — that we're feeling. It's also the velocity. According to data from The Wall Street Journal, this week's 10%-plus drop occurred over the fewest days of any correction of the past four decades.

As fellow investors, we feel it with you. As a business, with millions of our capital tied into service stock portfolios, we feel it with you.

We feel the euphoria when stocks rally like they did in 2019 (and for most of the past decade). And we feel the uncertainty -- the emotional tug -- when they fall 10% or more.

Maybe you just bought your first Motley Fool recommendation. Or maybe you've been investing with us across multiple services for many years. Regardless, we're here to make you smarter, happier, and richer by helping you understand market conditions and stay confident in the decisions you're making.

A chart fo red, green, and yellow bars.

Image source: Getty Images.

So what's going on?

The news about the coronavirus driving the sell-off is fluid and developing. There is much we don't know about the virus itself and how it spreads, but we do know that many companies have said that it will cause near-term disruptions and slowdowns. The CDC warned that the virus is likely to spread to the U.S. And today's news of a serious case of coronavirus in California without a tie to an existing outbreak was enough to push stocks down almost 3%.

With this much uncertainty in the air, driven by headlines, stories, and our own fast-spreading fears, stocks are showing some wariness, especially coming off a booming 2019.

So now what?

We're long-term investors, so we focus on just that: the long term. That means more than just a quarter or even a year. It means many years.

But we're not ostriches, either, putting our head in the sand while the rest of the world goes on around us.

Instead, we take a business-owners' mentality to investing, backed by more than two decades of success and data that helps us make better decisions in good times and bad.

Like any pandemic, the coronavirus is serious. We need to take it seriously. And like all good investors, we need to be prepared and armed with Foolish principles.

So as you are reading the news, considering your investment options, and planning on making decisions, keep these in mind.

Stocks are volatile in the short term, but over the long term, returns are far more positive than negative.

During a single day, it's a coin toss whether your stock goes up or down. Over a year, the odds improve so that two-thirds of the time you'll win. Stretch that out to three or five or 10 years, and your chances to make money skyrocket. In fact, in almost nine times out of 10 over the past 100 years, stocks make you money over any 10-year period.

Businesses grow. Stocks go up. Over years, not always quarters.

Yet stocks do indeed fall -- sometimes dramatically -- but they recover.

Looking at past data, corrections like this happen once every 12 to 18 months or so and last four to six months. It's been more than a year since the last correction, so we're not shocked to see one. In fact, we're kind of on schedule.

The silver lining is that corrections tend to snap back within about four months, according to Goldman Sachs data. Furthermore, keep in mind that over time, stocks spend three times as much time going up as going down. We just need to get through the down days to make sure we experience the ups.

Think like an owner, not a trader.

We never get tired of saying this because it needs to be said. Even those who buy into our investing philosophy might need a reminder in times like these.

Act like an owner of your businesses, not a trader of them. We don't trade tickers; we invest in companies -- great companies with business models that we believe are transforming their industries and making a difference in the world. Our favorite companies have loyal customers, growing markets, and unique advantages over their competitors. 

Stay invested in those kinds of companies that can deliver healthy sales and earnings growth over the next three, five, and 10 years. Don't let the daily or monthly gyrations in their stock prices scare you off. Be patient and remember why you're invested.

Come 2025, you'll be glad you stayed with them.

And have some cash on the sidelines.

My uncle used to say to me that cash never goes out of style. That's especially true in nervous markets. So keep some cash handy to put to work in stocks when they go on sale. Our real-money portfolios vary on the cash they keep (0% to 30%), so it's more a matter of personal taste. But having 5% or so as a balance to your Foolish stocks comes in handy on days like these. You might even want to put some money to work in our published recommendations or Best Buys Now.

Courage and Foolishness

We don't have a crystal ball to say stocks won't go down another 10% from here by midyear. They very well could — or they could rally. What's important is that you both understand the market volatility potential and commit to investing through it.

Keep in mind that more than half of the market's best days come within just a few weeks of its worst. So trading in and out around market volatility often proves futile -- and very un-Foolish.

It takes courage to hold on and keep investing in turbulent markets. We're here to help you find and maintain that courage.

Rest assured, it pays off in the long run.

Stay Foolish,
Andy Cross (TMFOpie)
Motley Fool Chief Investment Officer

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