To say that the stock market has been turbulent lately would be a major understatement. The S&P 500 is now in a correction, the Nasdaq has declined by 17% in less than three months, and many of the most popular growth stocks are down 50%, 60%, 70%, or even more.
It's completely understandable to be anxious right now. Nobody likes watching their portfolio decline day after day. I'm right there with you -- my stock portfolio is down by about 30% since mid-November. And a question on many investors' minds is: "Should I get out before things get any worse?"
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The short answer
The short answer to that question is "no," but it requires a little more explanation to truly understand why.
While short-term moves can be scary, it's important to realize how little they matter from a long-term standpoint. Here are four charts that can put things into perspective. Obviously, if we look at a chart of the S&P and Nasdaq over the past three months, it doesn't paint a pretty picture.
However, if we zoom out to the past three years, the recent correction looks much less menacing.
If we zoom out a little more to a 10-year chart of the two benchmarks, the recent market downturn looks like a mild blip in a clear upward trend.
Finally, if we look over the past 30 years, it's even smaller. The same can be said for the COVID-19 panic in March 2020, the 2008-09 crash, and the dot-com bubble bursting. Notice that none of these events prevented investors from achieving excellent long-term performance.
A reason to buy, not sell
If you're a long-term investor, times like these are opportunities to buy, not opportunities to sell.
On the other hand, it's absolutely true that the market could decline further. Some of the headwinds that are causing the massive rotation out of growth stocks (specifically inflation and rising interest rates) could certainly get worse before they get better, and stocks could drop a bit more.
However, long-term investors shouldn't be worried about being early. Timing the bottom of a broad and sustained market slump isn't possible to do with any degree of accuracy, despite what short-term traders might tell you. In other words, unless you make a very lucky guess, you are not going to buy at the worst possible time. And that's ok.
Here's why. Consider what would have happened if you had bought in early to the last couple major market downturns:
- In early 2020, the S&P 500 declined by as much as 34% from its all-time high, as uncertainty related to the brand-new COVID-19 pandemic scared investors. If you had been early and bought after the initial 10% correction, you would be up by about 50% in less than two years, and that's even after the recent drop.
- As the global financial system faced its worst crisis in modern history in 2008 and 2009, the S&P plunged by as much as 57% from its all-time high before bottoming in March 2009. If you had bought shares of a basic S&P 500 index fund after the first 10% dip in 2008, your investment would have generated a 293% total return in the 14 years since.
In both situations, the returns achieved from many individual stocks (especially some of the most popular growth names) would have done even better.
Here's the point. Although you might be temporarily upset with your decision to hang on to your holdings or buy more if stocks continue to decline, buying either index funds or solid, well-run businesses after a 10% market correction has historically been a very wise decision on a long-term basis. To sum it up, the answer to our initial question of "is it safer to pull your money out of the stock market now?" is a resounding "no." In fact, I'd argue that for long-term investors, pulling your money out of the market is perhaps the riskiest move you can make.
