Investors have been hit hard in recent weeks, with the stock market taking a sharp turn for the worse. The S&P 500 is down by nearly 7% since its peak in mid-June, as of this writing, while the Nasdaq has fallen by close to 11% in that time -- officially entering correction territory.
Periods of volatility are unnerving for even experienced investors, so if you're feeling a bit shaken up by this market tumble, you're not alone. But keeping a clear head and staying in the game is critical to not only surviving a downturn, but also taking full advantage of the earning potential.
Right now may not seem like a smart time to buy, especially if prices have further to fall. But there are three good reasons why I'm continuing to invest, and you should, too.
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1. The market is too unpredictable to time it accurately
In theory, the best strategy would be to sell your stocks when prices peak to get out of the market before it tumbles. Then when stocks are at rock-bottom prices, you can reinvest for a bargain. But in reality, it's nearly impossible to accurately time the market like this.
While the market has been falling fairly consistently these last few weeks, nobody knows whether this trend will continue. There's always a chance it could bounce back, in which case buying now while prices are lower can be the smartest move.
Case in point: In early 2020 when the market plummeted due to fear surrounding the COVID-19 pandemic, most people (experts included) did not expect prices to surge just weeks later. Those who had continued investing through the downturn were in the best position to snag stocks at their lowest prices right before the market went on to experience a new bull market.
Now, there are no guarantees that the market will go on to shatter records the way it did throughout 2020 and 2021. But it might, and the best way to maximize your potential gains is to continue investing now.
2. All downturns are only temporary
No matter what happens in the coming weeks or months, even the worst slumps won't last forever. By simply staying in the market, you can ride out the storm without losing any money.
Technically, you only lose money in the stock market when you sell your investments. If your stocks have already dropped in price and you sell now, you'll lock in those losses. But if you simply hold them until the market recovers, their values will likely increase again and you won't have lost anything.
Even if this slump turns into a full-on bear market, it's still only temporary. The average S&P 500 bear market since 1929 has lasted 286 days, according to data from Bespoke Investment Group. That comes out to around 9.5 months.
Meanwhile, the average bull market between 1929 and 2023 has lasted 1,011 days, or roughly two years and nine months. In other words, there's good reason to be optimistic about the future, and by staying invested during the tough times, you'll be well prepared to take advantage of the inevitable upswing.
3. Sell-offs can be smart buying opportunities
Investors are often encouraged to "buy low and sell high" to maximize stock market earnings. While timing the market is tricky in regard to "selling high," now is a fantastic opportunity to "buy low" -- or at least lower.
Again, timing the market effectively is nearly impossible, so nobody knows whether prices have further to fall. But rather than waiting for stocks to hit rock bottom, take advantage of the lower prices you're seeing right now.
Stocks have been incredibly costly over the past year, and while downturns are tough to stomach, they can provide a much-needed break from the hefty price tags. By investing now, you could potentially save hundreds of dollars on normally high-priced stocks.
Two important caveats
While investing in the stock market is a fantastic way to build wealth, there are a couple of important things to remember before you buy right now.
For one, make sure you have a robust emergency fund with enough savings to cover at least three to six months' worth of general living expenses. If the U.S. economy does take a turn for the worse and workers face more layoffs, it's wise to have a strong cushion to protect yourself without having to sell your investments.
Second, if you're able to invest right now, be sure you're choosing the right stocks. Many companies can perform well when the market is thriving, but they may struggle to bounce back after a downturn. By investing in strong stocks from businesses with solid underlying fundamentals, your portfolio is far more likely to survive any potential volatility.
Market downturns are never easy, but they can be much more tolerable with the right strategy. By continuing to invest in strong stocks and keeping your focus on the future, you can make the best of this slump and maximize your long-term earnings.
