What If the Market Stays Down for a While?

The market crashed, as you know, over much of 2008, dropping nearly 40%. It has been skyrocketing higher lately, though, so maybe we've just seen the market bottom. But what if it slumps again? Or what if it just kind of stays where it is -- for a long time? For as much as five or more years?

That's a scenario that will turn some people's knuckles white, and that might even start you hyperventilating a bit. We all want to see our portfolios keep rising, after all, don't we? Well, permit me to suggest a different point of view: If you are still a long way from retirement, then you should be happy if the market stalls or slumps.

When bad news is good
That's because you're in a saving and investing phase right now. As Warren Buffett has explained, "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Think about this -- it's true that over the past 10 years, the S&P 500 has lost ground instead of appreciating. That is bad news if you'd aimed to make money and withdraw it over that decade. It's bad news for anyone who plunked all their money in 10 years ago and took it all out 10 years later.

But if you've just been quietly and regularly investing in the market over the past decade, and you're still many years from retirement, the scenario is more promising. If the market had been rising each year and you invested $10,000 in an S&P 500 index fund each year, you'd be getting fewer and fewer shares for your money each year, as the price rose. But if it stayed at a low level for a long time, you'd be accumulating more shares each year, and when the market eventually started gaining ground again, you'd have more shares to profit from.

As Buffett noted, we're wrong to think that investors lose as the market falls. Instead, we should see that those who are trying to sell their investments lose as the market falls -- but investors who are still buying actually gain.

With stocks, too
This principle applies to individual stocks, also. I think, for example, of Intuitive Surgical (NASDAQ:ISRG), a robotic surgery equipment maker I discovered via our Motley Fool Rule Breakers newsletter (which you can try for free, accessing all its recommendations). I invested in it when it was around $100 per share, and then watched it quickly surge past $300. It later fell below $100, and has been slowly regaining ground. It was a bummer to see it take back so much of my gain, but its pullback gave me an opportunity to buy more shares at a relatively low price.

That doesn't mean that every stock that falls is a bargain. Some fall mainly because the overall market has slumped, but others fall for good reason, possibly never to recover. So look at fallen stocks as possible bargains -- but only buy after digging into them.

One possible way to distinguish values from value traps is to look at the returns companies generate on their own money. Here, for example, are some top-rated companies from the Motley Fool CAPS investor community, with returns on equity of at least 15% and stock prices that have swooned over the past year:

Data: Yahoo! Finance, Motley Fool CAPS.

Lists like the one above can be very helpful as you look for investments. They can give a great starting point for further research. (Or let us do much of the work for you, pointing you to promising researched stocks.)

What to do
So as long as you're not retiring anytime soon, and as long as any money you'll need within the next five to even 10 years isn't in the stock market, you don't have to gnash your teeth too much over market downfalls. Instead, look at their considerable bright side: They give you opportunities to invest at low prices, whether in the overall market or in individual stocks.

Gather more ideas in these articles:

• 3 Bargain Stocks for This Market
• The Top 10 Depression Stocks
• The Best Stocks to Buy in This Market

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