It's official. The S&P 500 has now entered bear-market territory. After peaking at the very start of 2022, the broad index has lost just over 20% of its value as of this writing.
A perfect storm of factors is to blame. Soaring inflation that's at a 40-year high, geopolitical turmoil, ongoing supply chain challenges, and a Federal Reserve that is aggressively raising interest rates have all scared investors from being optimistic to expecting a full-on recession in the near term. And the question of what to do from an investing standpoint is a pressing one.
In times like these, it's worthwhile to try and understand what an investing legend like Warren Buffett thinks we should do. Let's take a closer look.
Image source: The Motley Fool.
Stocks are on sale
Imagine that the things you buy in your daily life suddenly became cheaper. It might be hard to think about this now, but if the prices of gas, a car, rent, food, or even an Apple iPhone all dropped by a significant amount, how would you react? Consumers would be ecstatic because they'd be able to purchase more of the things they want and need at far lower prices. It's important to note that in this thought exercise, the consumer understands full well the value of those important things that he or she is buying.
Why is it, then, that when stock prices go down, everyone panics? If one looks at buying stocks like owning pieces of real businesses, which is what real investing is and what Buffett emphasizes, then shouldn't we all get excited in a time like this?
There are a couple things to consider in this situation, though. If you have a time horizon that is 10 years or more into the future, then buying stocks at cheaper prices is an advantageous thing for you. But if you're someone who is currently in or near retirement, then no doubt seeing the value of your portfolio plummet can be painful.
For most younger investors, however, now is an excellent time to buy stocks. The S&P 500 has always bounced back from a low to continue reaching new highs over time. Those who were aggressive in times of major uncertainty gained the most. "Be greedy when others are fearful," as Buffett says. There's definitely a lot of fear out there right now.
Don't time the market
Now that we've discussed whether it's a good idea to buy stocks when prices are down, let's look at the decision of buying now versus waiting. The Motley Fool recommends that investors consistently buy stocks, let's say every month, regardless of what is happening with the economy or the stock market. This is called dollar-cost averaging.
The advantage here is that you are simply not trying to time the stock market, which studies have shown is a loser's game. No one knows with any real level of certainty if the market is going to go up or down in the near future. But by focusing on what you can control, investing on a regular basis, and buying high-quality, blue-chip businesses, you can ensure that over time you will benefit from the market's gains.
It's impossible to call the stock market's bottom. What's worse is that you risk losing out on any possible gains by being on the sidelines and waiting.
This is undoubtedly one of the most difficult times to be an investor. But if you remain committed to your investment strategy and adopt a long-term mindset, the current environment will prove to be a fantastic buying opportunity.
