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Why a Rough Period for Stocks Can Be a Good Thing for Long-Term Investors

By Stefon Walters – Jan 4, 2022 at 8:30AM

Key Points

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Market dips can be viewed as discounts.

When it comes to investing, you should always try to keep your long-term financial goals in mind. Through the years, investors will undoubtedly encounter rough periods for their stock holdings -- that's just how it goes, and nobody is exempt from experiencing this. However, this should not deter anyone away from investing. 

Here is why a down period for stocks isn't necessarily bad and can even be beneficial for long-term investors.

Bear market stocks down loss chart

Image source: Getty Images

Buying the dip can pay off huge

In March 2020, the stock market plummeted due to reactions to the COVID-19 pandemic. The uncertainty surrounding the pandemic and the financial implications caused many people to panic sell their stocks and brace for the worst. For long-term investors -- especially those with many years until retirement -- this drop in stock prices represented an ideal buying opportunity.

Take Wayfair (W 0.13%), one of the biggest winners during 2020, for example. On March 20, 2020, Wayfair's stock price dropped to around $27, almost $2 lower than its IPO price in October 2014. Over the next year, Wayfair's stock rebounded, and on March 19, 2021, its stock price reached around $335 -- more than a 1,200% increase from its March 2020 low.

If you bought 100 shares of Wayfair on March 20, 2020, for $2,724 and held them until March 19, 2021, your investment would have been worth around $33,536. And while Wayfair's success following that time was more of an outlier than the norm, there were plenty of companies that produced admirable returns during that time. 

It also doesn't take an extraordinary circumstance (such as a global pandemic) for investors to be presented with such lucrative buying opportunities. Although they may not happen at the same scale, they do happen.

Cash is an important part of your portfolio

Although it shouldn't be the bulk of it, cash should be part of your asset portfolio and can help propel your financial goals. To begin, cash is one of the greatest protections against volatile markets. Recessions and market crashes are part of the financial market cycle and have historically been inevitable. The problem begins when people have all their wealth tied into assets like stocks, making them more susceptible to such events.

Not only does cash act as insurance during those times, but you can also use it to take advantage of opportunities in the market during downtimes. Your emergency fund -- which should be anywhere from three to six months worth of expenses -- is supposed to be for emergencies only, so you want to avoid using it to invest, even if the opportunity seems lucrative. That's where the cash in your portfolio comes in handy. 

Don't sweat daily stock price changes

Long-term investors should be focused on just that: the long-term. For various reasons, stock prices fluctuate. If you're a long-term investor and believe a company's fundamentals are sound and the long-term potential is there, you shouldn't necessarily panic when its stock price drops. If anything, you may want to view these drops in prices as "discounts" and take advantage if you're in a financial position to do so.

The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.

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