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
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.
What should you buy when the market is down? ›
Buy More Stocks, if you can
If you have saved enough and have other assets that generate income for you, this is the right time to buy more stocks. The reason for this is simple, a stock market crash signifies all the prices are down and this is the perfect opportunity to buy low and sell high.
Should I invest in mutual funds when market is down today? ›
Nobody can predict the market movements. Hence, instead of focusing on timing the market, one should be disciplined and should keep on investing in equity mutual funds irrespective of the market fluctuations. In the long term, these short term fluctuations do not affect your investments.
Should you buy index funds when market is down? ›
In the last section, we mentioned index funds, and those can be a great way to invest -- recession or not. By purchasing index funds -- especially S&P 500 index funds -- you're betting on the long-term success of U.S. business. Over long periods of time, that's been a pretty solid bet.
What is an equity fund Everfi investment game? ›
What is an equity fund? A mutual fund that is primarily invested in stocks.
What is the safest investment if the stock market crashes? ›
If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.
Is it good time to invest in mutual funds during recession? ›
Stock funds
A stock fund, either an ETF or a mutual fund, is a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are wagering less on any single stock than they are on the economy's return and a rise in market sentiment.
What is the best day of the week to buy mutual funds? ›
There is no specific "best day" in a week to buy or sell mutual funds. The mutual fund market operates daily, and the price of mutual fund units is based on the Net Asset Value (NAV) of the fund, which is determined at the end of each trading day.
What happens to mutual funds if the market crashes? ›
However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.
Where is the safest place to put your money during a recession? ›
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
What Are the Worst Things to Invest in During Inflation? Some of the worst investments during high inflation are retail, technology, and durable goods because spending in these areas tends to drop.
Is equity funding risky? ›
Risk: Debt and equity financing both involve risk. With debt financing, you risk defaulting on the loan and damaging your credit score. With equity financing, you risk giving up ownership and control of your business. Cost: Both debt and equity financing can be expensive.
Are equity funds good or bad? ›
Equity funds are practical investments for most people. The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund's portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund.
Are equity funds safe? ›
Equity funds are suitable for investors with moderately high to high risk appetites. Debt funds are suitable for investors with low to moderate risk appetites. Within the broader equity, debt and hybrid fund categories, there are various sub-categories.
Where is your money safest during a recession? ›
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
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. People can get very nervous watching their life savings drop in value, but once you hit the sell button, you can't get it back without starting again from scratch. Market crashes are often temporary.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
