After rallying from their early 2020 pandemic lows to new peaks this winter, the three most popular U.S. stock market indexes have tumbled this year -- so much so that people are wondering if this is the beginning of another recession. As of June 9, the S&P 500 was down 16% year to date, the Nasdaq Composite was down 25%, and the Dow Jones Industrial Average was down 11%.
But as an investor, I'm not losing any sleep.
Stock market corrections and bear markets are inevitable. The S&P 500 began in 1957, the Nasdaq Composite began in 1971, and the Dow began in 1896. They have existed through some of the worst economic conditions the U.S. has seen, yet they're still standing strong, with each producing returns over the decades that have generated massive wealth for long-term investors.
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Stay the course
When it comes to money, it's hard to prevent your emotions from influencing your decisions, and when they do, it's often not for the better. This is especially the case with investing, and those feelings -- whether fearful or upbeat -- can easily lead a trader to try to time the market. But there's an old saying in investing: "Time in the market is more important than timing the market." That's why dollar-cost averaging is one of the best investment strategies you can use.
With dollar-cost averaging, you avoid the temptation to time the market because you're making regular investments steadily on a schedule. You don't spend time wondering if a stock is at its lowest or highest level; instead, you stay the course and add shares according to the theory that, on average, matters will work out over the long run. Sometimes you'll buy when a stock is low and positioned for growth; sometimes, you'll buy when it's high and about to drop. What's most important is that you're consistent and stick to the investing schedule you set for yourself, whether it's weekly, bi-weekly, monthly, or whatever you choose.
As a long-term investor in individual stocks, I don't let myself get too wrapped up in the market's short-term movements. I realize that if I'm buying great investments while they're on the decline, I'm likely getting them at a discount. The more you can lower your cost basis (the average per-share price you've paid), the higher your profit can be when you sell if they recover. This doesn't mean all companies will rebound by any means, but great blue chip stocks tend to stand the test of time.
There are great companies in the indexes
For those who invest in stock index funds, they too have always managed to rebound in the long run, which is one of the main reasons to invest in them. Having that diversification in the fund ensures one or a couple of companies dropping doesn't have as big of a toll on the index as a whole. You just have to believe in your investing strategy and not be shortsighted in any moves. People and markets can be irrational. Movements in stock prices don't always mean companies are fundamentally different; sometimes, it's just a byproduct of human irrationality. When a lot of people get anxious about market conditions and want to sell their investments, the prices of shares can move lower and cause a cascade effect.
There's a reason for legendary investor Warren Buffett's aphorism, "Be fearful when others are greedy and greedy when others are fearful." He understands that stock market drops caused largely due to panic selling present opportunities to investors who are focused on the long run. If a company is a good buy at $200, it should be a great buy at $150, if you believe in it long term.
