Global stock markets are in absolute turmoil as the COVID-19 pandemic wreaks havoc around the world. Few investors have ever experienced the extreme volatility the past month has brought as a significant share of normal economic activity has been grinding to a halt. Major market indexes like the S&P 500 and Dow Jones Industrials have made more daily swings up or down by 5% in the past few weeks than they had in the prior 12 years.
Since the stock market set a record for the fastest 10% decline in history in late February, it has broken that record at least two more times, and even lost more than 10% of its value in a single day on March 11.
It's enough to make you want to pull everything out of the market and hide in a cave for six months until things return to normal -- whatever normal will look like on the other side of this.
And if that's your instinct, trust me, I understand: Since reaching a major financial milestone in late February, I've seen my portfolio lose substantial value.
Yet if we can look beyond this rising emotional and financial turmoil, history tells us that, now, with the market in an extended period of panic, is when we should act aggressively as buyers.
The historical case for buying now
As of noon Friday, the S&P 500 index is down about 29% from its 2020 peak, and almost three years worth of gains have been wiped out:
And let's be honest: Most of us expect stocks will continue to fall. We don't even know how bad things really are out there yet, because there isn't enough up-to-date economic data, but we know the travel and hospitality industries are all but shut down, sports leagues are closed for the foreseeable future, and in many parts of the country, pretty much all businesses that are open to the public but not essential to our well-being are being forced to close their doors or seriously curtail their operations.
But what we don't know is exactly how stocks will behave. Yes, they probably will fall more, but it's a mistake to try too hard to be precise about when to "get in" during a market crash. A look at the long-term returns of the S&P 500 should help put that into better context:
As you can see in the chart above, every major stock market crash presented people with an opportunity to invest; and even investors who bought in the middle of a crash and watched stocks fall even further before they recovered still profited enormously.
Avoiding the fallacy of "catching the bottom"
Let's use the 2007-2009 Global Financial Crisis as an example. On Nov. 20, 2008, the S&P 500 was at 752.44, down 52% from the pre-crash peak it hit in October 2007:
This was during the heart of the worst financial crisis the world had faced in 80 years. Over the six weeks that followed, stocks began to recover, but that recovery faltered, and by March 9, 2009, stocks had fallen 28% from their January peak:
A lot of people who bought during the late-2008 low probably felt like geniuses for a month or two, before feeling like idiots for having "gotten in too soon" after the market fell sharply once again.
But whether they bought near the first bottom in November 2008 or the actual bottom in March 2009, those investors have done incredibly well. The S&P 500 is up 212% from the first bottom, and 248% from the final bottom in March 2009. And when you add in the dividends paid, the total returns surge to 303% and 342% respectively.
To put it bluntly, don't let the fear that an investment might look stupid in a few weeks or months cause you to miss out on what should prove to be incredible market returns over the next five, 10, or 20 years.
Don't have cash on hand to invest? Do this instead
Even if you don't have a pile of cash set aside to invest in the market right now, there's a good chance that, like tens of millions of other Americans, you have a retirement plan at work. If that's the case, it's probably a 401(k) or similar plan that allows you to contribute a portion of each paycheck automatically.
If that's the case, the best way you can make the most of this market crash is to simply crank up your contributions as high as you can for now, and direct those contributions to low-cost, broad market index funds such as the SPDR S&P 500 ETF Trust (SPY 1.12%), the Vanguard S&P 500 ETF (VOO 1.07%) or the Vanguard Total Stock Market ETF (VTI 1.16%). Chances are, your 401(k) offers a fund that is similar in makeup and fees to one of those.
Don't aim for precision: Buy aggressively
It's tempting to tell yourself you should wait just a little longer because stocks will fall more. They very well could -- and to be honest, I think they will. However, we don't know whether that will prove true or not, and as the charts above make clear, even an investment that looks bad in the short term should prove quite profitable in the fullness of time.
I'm not just preaching this message: I'm acting on it myself. I've made numerous investments and plan to continue aggressively buying. My wife and I have also doubled our 401(k) contribution rates and will maintain those levels as long as we can.
Whether you have the cash on hand to deploy into stocks or are only able to crank up your 401(k) contributions, now is the time to start acting if you want to profit from the market crash of 2020.