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Dow Down: Is It Time to Buy?

By Adria Cimino – Sep 21, 2021 at 10:00AM

Key Points

  • The Dow Jones Industrial Average has slipped nearly 4% this month.
  • The possibility of a debt default by China’s Evergrande Group and the ongoing coronavirus crisis are two elements weighing on the market.
  • Investors should remember history repeats itself: Sell-offs and crashes are followed by recovery.

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Worries about the economy are pushing some investors to sell.

The Dow Jones Industrial Average has kept investors happy most of the time this year. Gains have happened pretty steadily -- with the index heading for a 15% annual gain as of Aug. 31. And then, with September, the worries came marching in. Various factors are weighing on stocks. And you may not be too happy as you look at your portfolio right now. The Dow has slipped for the past three weeks. And for the month, it's down 3.9% through yesterday. So, does this mean it's time to sell or simply hold? Or does it actually mean it's time to buy stocks? Let's take a closer look and find out.

An investor studies something on his laptop and takes notes in an office setting.

Image source: Getty Images.

News that hurts

First, let's check out the news that's hurting stocks at the moment. One major problem is the situation of China's Evergrande Group. The real estate company -- with debt of around $300 billion -- says it may not be able to meet financial obligations. Investors fear a massive default in China would hurt the global economy -- meaning trouble for everyone.

Closer to home, investors worry about a potential U.S. debt default. Treasury Secretary Janet Yellen said in a Wall Street Journal op-ed that the country must lift the debt ceiling. If it doesn't, the government may not be able to pay its bills. A possible default could come as soon as next month.

And investors also are concerned about the delta variant. The daily number of new coronavirus cases has declined in recent days. But it's still too early to say whether that number will continue to drop. Cases have climbed since early July.

Of course, these elements may be problems for near-term stock performance. But it's important to remember your investment horizon. And this is where I'm going to say how great it is to invest for the long term. If you do, these sorts of events may put a frown on your face as they happen -- but they won't damage the value of your investment. That's because if you haven't sold, you haven't lost. And if you buy strong companies that can make it through tough times, your portfolio will continue to grow once the storm passes.

Time to step in

OK, so that means we should hold on and avoid panic selling. But what about actually buying stocks? Again, if you're a long-term investor, this actually is the ideal time to add to positions or create a new position. Why? Market sell-offs aren't about a drop in poorly performing companies. When the market declines, many strong companies suffer, too. And that means it's a great time for the long-term investor to step in and do some bargain hunting.

For stocks you know well and already own, you may quickly add more shares to your portfolio. Before opening new positions, though, it's important to have a look at the companies' prospects. Some companies may have performed well in the past -- but that doesn't mean they can navigate today's rough waters and come out afloat.

I like to study the past few quarterly earnings reports and look at any revenue or earnings guidance. I also check out the size of the market the company serves -- is it growing? Will the problems pummeling the stock market today actually hurt the company's sales a few years down the road? For instance, I would buy shares of Walt Disney (DIS -3.52%) or Nike (NKE -2.30%) today. Both have lost more than 3% over the past five trading sessions.

DIS Chart

DIS data by YCharts

I'm confident about these companies' prospects. Disney owns the world's most-visited theme parks and rapidly growing streaming services. And Nike has brand strength and a connection with fans that continues to grow. So, any decline in these shares is a buying opportunity.

It's easy to panic when you see even the strongest stocks falling day after day. But remember that you're in this for the long term. And sell-offs -- and even full-fledged crashes -- always are followed by recovery. The Dow last year fell 30% during the coronavirus market crash. Yet it still managed to climb 64% from its low point to the end of the year. And that was during the uncertainty of an ongoing pandemic. So, as the market falls, stay cool, study those stocks you've always wanted to add to your portfolio -- and think long-term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike and Walt Disney. The Motley Fool has a disclosure policy.

Stocks Mentioned

Walt Disney Stock Quote
Walt Disney
DIS
$95.93 (-3.52%) $-3.50
Nike Stock Quote
Nike
NKE
$109.62 (-2.30%) $-2.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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