As we near the last month of 2022, to call this year rough for the stock market would be an understatement. As of Nov. 28, the S&P 500 (^GSPC 0.02%) is down over 16%, the Dow Jones is down over 6%, the Nasdaq Composite is down over 29%, and countless blue chip stocks have seen their value drop well into the double digits.
With falling stock prices and so much economic uncertainty right now, many may be wondering if it's best to delay their investing until the new year. Simply put, the answer is no -- you should not stop investing until 2023. Here's why.
Bear markets are inevitable
A bear market is defined by a drop in major indexes (particularly the S&P 500) of more than 20% from recent highs, and that's exactly what happened this past summer. When it comes to inevitable occurrences, it's safe to put bear markets in the category alongside death and taxes. Since 1928, there have been 27 bear markets in the S&P 500, and the previous five had more drastic declines that what we're currently witnessing:
| Start and End Months | Decline Percentage | Length of Bear Market |
|---|---|---|
| March 2000 to Sept. 2001 | 36% | 546 days |
| Jan. 2002 to Oct. 2002 | 33% | 278 days |
| Oct. 2007 to Nov. 2008 | 51% | 408 days |
| Jan. 2009 to March 2009 | 27% | 62 days |
| Feb. 2020 to March 2020 | 33% | 33 days |
Data source: Ned Davis Research. Percentages rounded up to the nearest whole number.
The sooner investors come to terms with bear markets, the better they can navigate them and view them as an opportunity instead of a deterrence and reason to stop investing. Particularly, now can be the time to grab some great companies trading at a "discount" and potentially lower your cost basis.
Your cost basis is the average price you've paid per share of a particular stock. For instance, if you bought 10 shares of a stock at $200, your cost basis would be $200. If the price dropped to $150 and you bought 10 more shares, your new cost basis would be $175. Your cost basis is important because it determines how much you (hopefully) profit when you eventually sell shares down the road.
Avoid trying to time the market
The main argument for pausing your investing until 2023 is that you believe prices will continue to drop into the new year. In theory, it makes sense: Why buy stocks now when you can potentially get them for cheaper later, right? The problem is that nobody can predict how stock prices will move short term. Not me, not you, not Warren Buffett, and not Wall Street. Timing the market is virtually impossible to do consistently over the long run.
Instead, investors should use dollar-cost averaging, which involves investing a set amount at preset intervals, regardless of how stocks are performing at the time. For example, you could decide to invest $500 every other Tuesday. When those Tuesdays come around, it doesn't matter whether stock prices are up, down, or stagnant -- you make your $500 investment.
Using dollar-cost averaging accomplishes two things: It keeps you consistent and prevents you from trying to time the market.
Stay the course
There is a reason the investing phrase "time in the market beats timing the market" is frequently repeated: It's stood the test of time. Rarely is jumping in and out of the stock market a better alternative than sticking to your investments. Here is how a $10,000 investment in the S&P 500 in 1980 would've looked at the end of 2020 based on how many of its best days (defined by top daily gains) an investor missed:
| Best Days Missed | Annual Return | Value of Investment |
|---|---|---|
| 0 | 11.8% | $980,911 |
| 10 | 9.7% | $437,902 |
| 20 | 8.2% | $254,215 |
| 30 | 7% | $158,562 |
| 40 | 5.9% | $103,728 |
| 50 | 4.9% | $70,053 |
Data source: Ned Davis Research and Edward Jones.
To be fair, an argument could be made for how an investment would look if investors missed some of the S&P 500's worst days during that time, but that comes back to trying to time the market. It could also add insult to injury if you miss some of the best days and experience some of the worst. The most important thing is removing some of the emotions from investing and trusting the long-term potential of your investments.
Short-term stock price fluctuations can largely be ignored as long as the long-term results are there. You don't want to make short-term decisions that set back your long-term financial goals. Stay the course and keep your investing going if you have the means.
