What You Need to Know Before the Next Market Downturn

In 10 years of practicing financial advice, I have never heard anyone say, “The housing market’s down 20%, I’d better sell my house before the bottom drops out!” That would be crazy because we all know that asset prices go up over time.  For example, according to the U.S. Department of Housing and Urban Development, the average home cost $208,000 at the worst of the great recession[1].   Anybody else wish they could find an average house for $208,000 today?

Earlier this year, a looming trade war sparked a 19% drop in the S&P 500.  Despite stock’s clear history of trending up over time, investor worry reared its ugly head.  Here’s what you need to know to guard yourself against worry the next time we see a 20% downturn. 

Downturns Are “as Common as Dirt"

Every time a 20% downturn comes around, all the talking heads predictably start telling us why this is evidence of a broken system.  This year, they told us international trade had been broken.  In 2022, we were told the healthcare system would be utterly overrun, resulting in unimaginable loss of life which would lead to economic turmoil.  The list goes on.  The truth is 20% downturns aren’t evidence of a broken system just like a change of season in the Winter isn’t evidence of a coming ice age.  Stock prices, like the weather, are cyclical and nothing to worry about… as long as you’re prepared.  So why don’t we have to worry about 20% downturns?

Good Things Often Happen After a 20% Downturn

History shows that, after a 20% downturn a recovery is inevitable, eventually.  On average, it takes just 289 days to recover from a 20% or more downturn.[2] Abandoning stock investments after a 20% downturn is like hitting the gym hard for a week then giving up because all your muscles ache.  In both scenarios, you endured the crumbiest part of the process and missed out on all the fun!

History also shows that many stock investors continue to receive dividends after a 20% downturn.  It’s easy to forget that there are two ways to make money with stock.  The first way is the obvious increase in a stock’s price.  The second, more subtle way, is the dividends companies pay their stockholders.  Having dividends flow into your investment account can be particularly powerful after a 20% downturn because they can be reinvested while stock is on sale!

Staying Focused Can Be Tough

The talking heads can be so compelling!  Yet, their critiques are just noise in light of these all-important truths.  Stock is cyclical by nature, and downturns are not evidence of something being “wrong”.  A downturn is just the temporary discomfort that precedes a recovery. So, stay invested and don’t miss the best part!  Besides, continuing to buy while the market is down, whether through reinvested dividends or investing additional funds, allows you to acquire more stock for less money, which fuels future growth.  Staying focused (and invested) can be tough, but it’s the only effective way to take advantage of stock’s long-term upward trend!