If you're worried about a market correction, generally defined as when the market falls by at least 10% -- or even a harsher market crash -- you're not alone. The S&P 500 index, which represents about 80% of the total U.S. market's value, rose about 18% in 2020 and a whopping 31% in 2019. It retreated just 4% in 2018, after gaining 22% and 12%, respectively, in 2017 and 2016. After a period with so much in gains, many expect the market to correct or crash one of these days.
You should worry about a market downturn if you've got money invested in the stock market that you'll need in the next year or two -- because you never know when a downturn will strike, and some of them last a while -- though most do not. Other than that, though, there's relatively little to worry about.
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What to do if the market crashes
All stock market investors should expect volatility. The stock market has always gone up over time, but not in a straight line. Over the 50 years from 1970 to 2020, there were at least 28 stock market crashes or corrections. Crashes don't matter that much if you're a long-term investor. Yes, they can sometimes get worse when many investors panic and sell stocks, but such folks often end up buying high and selling low -- i.e., doing the opposite of what you should do if you want to make money in stocks.
Remember that if a holding of yours drops now and then along with the overall stock market, there's probably little that has changed about the business or its future prospects. If it's just as promising as it was before the market decline, just hang on. Those who make big money in great stocks usually do so over long periods, hanging on through ups and downs.
Consider this forever stock: Costco
Another way to deal with stock market downturns, especially if they really stress you out, is to invest in stocks that aren't too volatile. A good example is big-box discount retailer Costco Wholesale (COST -0.11%).
Costco's "beta" over the past five years was recently 0.65. Here's what that means: A stock with a beta of 1.0 has generally moved in lockstep with the overall market. If the market advanced by 5%, so did the stock -- and vice versa. A stock with a beta of 1.5, though, was 50% more volatile. So if the market rose 10%, it tended to rise 15% -- and if the market sank by 20%, it might have fallen by 30%. Costco's beta of 0.65 means that it's less volatile than the overall market. If the market rose or fell by 10%, it generally rose or fell by 6.5%, on average.
That doesn't mean Costco won't grow at a decent clip. It has done so for many years, just without much fanfare. Over the past 20 years, for example, its stock has averaged annual gains of 14.5% with dividends reinvested, including nearly 20% over the past 10 years. The S&P 500, meanwhile, averaged gains of 8.1% and 14.3%, respectively, over those periods.
Enough about Costco's beta and returns, though. The company is a terrific long-term investment for plenty of other reasons.
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A lot to like about Costco
The best thing about Costco is its business model, which serves its three main constituents -- its customers, employees, and shareholders -- very well:
- Customers: It marks up most of its offerings by no more than 14% to 15%, which gives shoppers good prices.
- Employees: It pays its workers above-average rates: The company recently raised its minimum wage to $16 per hour, but the company says the average worker earns around $24 per hour. That results in happier workers who stick around longer. A February article in Barron's noted that overall employee turnover is believed to be around 13%, versus about 20% for the overall industry -- and that among workers who have been there a year or longer, it's far lower, around 6% to 7%.
- Shareholders: Remember those average annual returns? The company pays a dividend, too, recently yielding 0.8% -- and that payout has been increased by an average annual rate of 12% over the past five years. The company has plenty of room for further growth as it opens more locations in the U.S. and abroad.
You may not realize it, but Costco has grown into one of the biggest retailers in the U.S., recently boasting 809 warehouses, with 559 in the United States and Puerto Rico, 105 in Canada, 39 in Mexico, 29 in the United Kingdom, 29 in Japan, 16 in South Korea, 14 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France, and China. It rakes in more than $166 billion annually, and that scale gives it bargaining power with suppliers.
Another big benefit for the company is its membership structure. It has more than 46 million households paying $60 annually for the privilege of shopping at Costco. Adding in business memberships, the company reaps more than $3 billion annually just from memberships -- which helps it keep markups low on merchandise.
Dig deeper into Costco and you're likely to find more to like about it. At a minimum, though, know that it can be a welcome addition to your portfolio if you're worried about market downturns, because it's far from volatile.
