The past year has been catastrophic for many investors. Runaway inflation and rapidly rising interest rates triggered a stock market meltdown that has erased more than $9 trillion in wealth. In fact, the S&P 500 had its worst first half since 1970 as recession fears drove the benchmark index into a bear market.
Coping with massive losses can be difficult for investors, but dealing with uncertainty is often the hardest part of any downturn. It's impossible to predict when the stock market will rebound, but smart investors do know one thing: Now is the best time to buy stocks. In fact, Warren Buffett once said, "The best chance to deploy capital is when things are going down."
Here are two reasons why that's true.
Image source: Getty Images.
1. Most of the stock market's best days take place during bear markets
Buffett penned an op-ed piece for The New York Times during the Great Recession, explaining the simple rule that dictates his buying: "Be fearful when others are greedy, and greedy when others are fearful." Those words are especially relevant right now. The financial world is mired in fear, and fear "serves up bargain purchases," according to Buffett.
Of course, quoting famous investors is fine, but hard facts are far more useful. And the facts are crystal clear: Bear markets have historically been the best time to buy stocks, simply because missing the inevitable rebound is one of the most costly mistakes an investor can make. Case in point: The S&P 500 climbed 517% between Jan. 2002 and Dec. 2021, but if the 10 best days in that period are excluded, the return drops to 183%.
That means any investor who missed the 10 best days in the last two decades paid a heavy price for sitting on the sidelines. But here's the most important detail: Eight out of those 10 days took place during a bear market, and the other two took place within one month of a bear market's bottom. For that reason, it simply does not make sense to sit on the sidelines right now.
2. The odds of a positive return improve with time
A long-term mindset is one of the most valuable traits any investor can possess. Over short periods of time, the stock market moves up and down in response to countless variables interacting in complex ways, which makes forecasting short-term price action impossible. But over long periods of time, the stock market has consistently created wealth for patient investors. To that end, Buffett once observed "the stock market is designed to transfer money from the active to the patient."
The chart below illustrates the importance of a long-term mindset. As indicated, the S&P 500 is more likely to produce a positive return over longer time horizons.
|
Holding Period |
Odds of a Positive Return in the S&P 500 |
|---|---|
|
1 year |
73% |
|
5 years |
90% |
|
10 years |
97% |
|
20 years |
100% |
Data source: Highcharts. Note: based on data collected from Jan. 1871 to Nov. 2022.
Crestmont Research has published similar data. It indicates that the S&P 500 has produced a positive return over every rolling 20-year period since 1919. In other words, if an investor purchased an S&P 500 index fund any time in the last century and held that index fund for at least 20 years, they made money on their initial investment.
In a nutshell, the odds of making money in the U.S. stock market improve with time, and there is no time like the present to start (or continue) investing. To borrow one last quote from Buffett, "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead."
