A volatile stock market can be worrisome, especially for new investors. When the value of your portfolio has dropped, you may be unsure about continuing to put in more money. You might even want to cut bait and sell your investments entirely.
While this is a normal reaction to a down market, it's one that every investor needs to learn how to get past. Experienced investors know that it's important to continue investing when the market is down. In fact, it's one of the best money moves you can make.
Why you should invest when the market is down
Stocks, and the stock market as a whole, go through ups and downs. These are often due to the economy and not necessarily related to a stock's underlying value.
For example, during the Great Recession, stock prices dropped by about 50% between late 2007 and early 2009. That's a stressful situation for any investor. But many of those stocks were still quality investments that recovered and became even more valuable. The investors who buy during down periods are able to get a lower price, and eventually make even more money if the stock recovers.
Ramit Sethi, who stars in How to Get Rich on Netflix, recently shared a smart reason why you should continue to invest when the market is down. As he put it, "When the price of something you want goes down...you're happy about it!" If a product you love went on sale, you'd probably take the opportunity to buy it at that lower price.
It works the same way with investing in stocks. If you believe a stock is a good long-term investment, you should invest in it regularly. If the price goes down, don't look at it as a bad thing. Look at it as an opportunity to get more for your money.
Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall. And you definitely shouldn't panic sell your investments. Once you sell, you lock in your losses, and you'll miss out if those investments bounce back.
How to choose quality long-term investments
The key to making this work is to choose investments that you believe will be successful over the long haul. That way, you can continue to invest with confidence no matter what the market does.
Despite what some people believe, your investments don't need to be individual stocks that you pick yourself. They certainly can be, if you want to build your own portfolio. But there's also a much simpler option that can be just as effective -- investment funds. These put your money in a large number of stocks, bonds, or both, giving you a diverse portfolio in as little as one investment. Options include:
To give you a firsthand example, I've been investing in a total stock market mutual fund for years. It distributes my investment across the entire U.S. stock market. During the time I've invested in it, the price has fluctuated quite a bit.
No matter the price, I've put money in it every month. I know that historically, the stock market has produced an average annual return of about 10% (before inflation, that is). Even though nothing's guaranteed with investing, I'm reasonably confident that over the long term, the U.S. stock market will keep going up. So, when the market is down, I just look at it like I'm getting more for my money the next time I invest.
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FAQs
Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall. And you definitely shouldn't panic sell your investments.
Should I continue to invest when the market is down? ›
Should you invest when the market is down? Yes. You should also invest when the market is up. And don't forget to invest when it holds steady as well.
Is it good to invest when the market is low? ›
The best time to buy stocks is when the share prices of a given stock are at a low. There is always a chance that they will drop even further, but buying at a low price is significantly safer than buying at a high price where the price of the stock is unlikely to climb much higher.
What is one thing never to do when the stock market goes down? ›
Don't panic-sell
The most important thing not to do in a market crash is panic-sell.
Should you buy stocks when they are falling? ›
So, should you buy stocks when they are down? Absolutely – the key is finding out when they're going to rebound, though, and buying at that point. You don't want to buy on the way down and catch a falling knife. You want to bottom fish stocks when they're actually at the bottom.
When should you not invest? ›
Choosing which account to open for your savings can be as important as how much you save. “I advise my clients that any money they are going to need to spend in the next two to three years should not be invested in stocks,” says Itkin. “You do not want to have to sell during a bear market and risk losing principal.”
Should you invest in a falling market? ›
there can be some good investing opportunity even in falling market. Let's take yesterday's example when post budget the market down to 800 point. It's best if you can buy assets when prices are depressed. If possible, you want to be buying stocks/re/etc when prices for those things are way down.
What is the 11am rule in trading? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
What is the 3-5-7 rule in trading? ›
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
Where does all the money go when the stock market goes down? ›
“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the 3 day rule in stocks? ›
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
Should I keep investing when the market is down? ›
Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall. And you definitely shouldn't panic sell your investments.
What is the no. 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade.
Should I invest when the market crashes? ›
There is nothing that will definitely go up if the stock market crashes. Interest bearing investments such as money market funds will continue to earn interest. Bonds may hold their value or increase, and individual bonds including Treasury's will continue to earn interest.
Should I keep buying stocks in a recession? ›
And, if prices start to rise, you'll end up buying more shares at the lower prices and fewer shares when your favorite stocks start to get more expensive. In a nutshell, a recession can be a great time to buy the stocks of top-notch businesses at favorable prices.
Should I take my investments out of the stock market? ›
While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
Should you sell all of your investments if the stock market goes down? ›
While selling stocks during a market downturn might make you feel better temporarily, doing so reactively because stocks are tumbling isn't a good long-term investment strategy.
