A falling stock market is a scary time to invest. At times it can feel a lot like you’re throwing good, hard-earned money at something bad – like a sinking ship! This might cause you to ask: What’s the point? Should I just turn off my retirement contributions for a few months until things turn back around?
My answer to that is absolutely not! In fact, five years from now you may be kicking yourself that you didn’t do more to leverage this opportunity when you had the chance. That’s why in this post, we’ll explore why investing while the markets are down still makes good financial sense.
Market Downturns are Normal
The main thing to remember about market crashes is that they aren’t forever. If you take a long-term perspective and look at any 50-year slice of the financial markets, then you’ll see that investments are cyclical and go from boom to bust every few years. The process is very natural.
As an example, here’s what the S&P 500 stock market index has looked like over the past 100 years:
Image source: Macrotrends
Why Do Market Prices Fall?
What makes the stock market go from boom to bust? There are literally thousands of answers to that question. But some of the most common ones might be:
- Unrealistic expectations (speculation) – When the price of something (or many things) becomes out of sync with the money that consumers and businesses have to spend. A great example of this was back in the early 2000s when investors poured tons of capital into young, unprofitable Internet companies.
- Bubbles – Shortly after the Dot-com bust, mortgage companies began granting everyone loans whether they could afford them or not. This caused a major housing bubble which eventually crashed the market and became the Great Recession of 2008.
- Monetary policy – When the Federal Reserve raises interest rates to fight off inflation (like it’s been doing throughout 2022), that can cause businesses to slow down and potentially trigger a recession.
In all of these situations, public sentiment turns negative and consumers begin to pull back. That’s the point where not just one industry but all businesses start to suffer. In addition, unemployment begins to rise and cause businesses to spiral down even further, and that makes things begin to look even scarier.
The Markets Eventually Recover
Despite all of this, the pain doesn’t last forever. Just take another look at the graph above.
The average recovery lasts for an average of 20 months. Meanwhile, a bull market (the upward swing that follows a recession) can last for several years. The longest-running bull market occurred between 2009 to 2020 lasting 11 years.
What this means for you is that there can be more upsides than down if you keep a long-term perspective. And believe it or not, most of the benefits will occur if you’re brave enough to invest while the markets are down.
Why You Should Save During a Down Market
Do you want to leverage a falling economy to your advantage? If so, then keep on contributing to your 401ks and IRAs. Here’s why:
You’ll Buy Shares of Good Assets
Just because the entire stock market is crashing doesn’t mean that every company is doing terribly. In fact, some might be posting record earnings or even going through an expansion.
This creates a unique buying opportunity. When the price of something you want is on sale, you wouldn’t hesitate to buy it, right? The same goes for good securities. Think of a down price as a temporary sale.
After all, companies that are doing well will be some of the first ones to shoot back up in price once the markets turn around. So those are assets that you’ll want to have when that time finally comes.
You’ll Take Advantage of Volatility
Throughout a down market, there will be plenty of highs and lows, and some of these fluctuations can get pretty extreme. However, with a long-term mindset, this can be a good thing.
Proactive investors will jump all over a good company when the stock price dips below some arbitrary number like 10 or 20 percent. Others take an automated approach to dollar cost average by setting up their accounts to automatically buy shares every week or month. Either way, the result will be buying up assets when they’re at their most vulnerable, and that’s going to have a lot of upside when the markets pick back up again.
Continue to Get Employer Matching
Do you work for a company that offers 401k matching contributions? If so, then you should know that turning off your contributions could also mean not receiving these employer contributions. That would be like passing up free money!
Good times or bad, you’ll want to keep on getting every dollar you can from your employer. Especially when it comes to dollar cost averaging, employer matching can amplify this strategy. If you get a dollar-for-dollar match, then you’re essentially buying up twice as many shares at a discount.
Because No One Can Time the Market
Perhaps the main reason to keep saving is that no one knows when the markets will turn back around. Just as quickly as they dropped, stocks can have a great week or couple of weeks. Then before you know it, the market will be up 20 percent or so. By then you’ll have already missed out!
A Better Idea – Increase Your Retirement Contributions!
If you really want to do your future self a favor, then do the opposite of what feels natural: contribute more than ever during a market crash. By doing so, you’ll buy up a higher volume of shares than you normally would, which means you’ll have even more assets that could go back up in value.
I know that can feel counterintuitive. But as billionaire investor Warren Buffett famously said, “be fearful when others are greedy, and greedy when others are fearful.”
If you’d like to carve out more room in your budget to contribute to your retirement plans, then use an app like Buxfer to help. Buxfer will let you set spending limits in each of the major categories and then automatically track your purchases. This will help you to stay on track so that more of your money can go towards your financial goals.
Click here to find out more about the Buxfer Insights feature.
Featured image source: Pexels