Why Market Turmoil Is The Long-Term Investor’s Biggest Champion
How do you buy low? You always hear the phrase “buy low, and sell high.” There are two parts to this statement: buying low and selling high. But what is low? And what is high? Who the heck knows? Certainly not me. Let’s look at the first part of this statement — buying low — and see how a simple strategy called dollar-cost averaging allows investors to “buy low,” whatever that actually means. More exciting, we’ll see how tumultuous markets, as we are experiencing today, prove to be the strategy’s biggest champion.
The S&P 500 hit an all-time high of $3,386 on February 19, 2020. As the economy moved forward alongside the stock market, the world was hit by a pandemic that has rattled the economy, labor markets, stock markets, businesses large and small, and has me wearing a face mask as I write this in fear of contracting a deadly virus. People are rattled. I’m one of them.
From the S&P 500’s all-time high to March 23, 2020, the S&P 500 tumbled 34% from $3,386 to $2,237. It fell like a rock, covering this distance in just 23 trading days. The interesting thing about this tumble — as with all tumbles — is that yes, the market slid a lot — 34% in this case — however, in order to get back to the all-time high of $3,386, the market needs to advance 51% from $2,237 to $3,386. Depending on how you look at it, this can be a bad thing or a good thing.
What if I give you psychic powers to pick the stock market low each year? If March 23 is this year’s low (I’m not saying it is), you as a savvy psychic invest every spare dollar on this date. Each dollar invested on March 23, 2020 will gain 51% if the market is to ever match the high-water mark of $3,386. A 51% return sounds pretty good to me! Unless as psychic, you can also see that February 19, 2020 is the day it all ended — the day the US peaked, the day of America’s highest economic output… ever, the day American corporations produced their most value… ever, and the day the US stock market saw its highest mark… yes, ever. Then we will hit the $3,386 mark again. The dollars invested on March 23rd are powerful, and history shows they will earn their deserved 51% return sooner than we may think. More on this in a second.
Now, let’s say you aren’t psychic and can’t pick March 23 as this year’s low. You have no idea if the market is going to rebound or continue its freefall. Your guess is as good as mine, which is as good as anybody’s. For argument’s sake, let’s say March 23 is the bottom. How do we potentially nail this date and invest every spare dollar? The best strategy is simple and automated. It is where we invest a certain amount of money on a specific schedule and never miss that schedule. This robotic approach to investing is called dollar-cost averaging, and it is extremely beneficial to long-term performance. Market volatility, as we’re seeing today, is the strategy’s best friend.
Personally, I take 20% of my salary every pay period and invest these dollars in the S&P 500. This happens automatically on the 1st and 15th of every month. I also reinvest all dividends, which are paid and reinvested on an automatic quarterly schedule. In this situation, 20% of my salary is invested on March 15 and April 1. As a bonus, dividends are paid and reinvested on March 16. Lucky timing here! I don’t hit the March 23 date, but I’m surrounding it. When the market returns to its high-water mark of $3,393, the dollars invested on March 15 earn 42%, the dividends invested on March 16 earn 42% and the dollars invested on April 1 earn 37%. Not bad returns!
Psychologically, if the market rebounds, I’m happy because I took advantage of the lower prices, and my investments are growing again. If the market continues to fall, I’m not happy, but I see the silver lining as my investing schedule continues and more dollars are invested at lower prices. I get it. It is understandably hard if not impossible to look at things this way when the market is tumbling alongside your net worth. But you must.
I hinted earlier that markets recover faster than expected. Since 1929, there have been 16 bear markets, which are defined as a 20% drop of a market index from its previous high. Research by Fidelity shows that for these 16 bears, the average length was 22 months with an average decline of 39%. The kicker: the average one-year return after reaching market bottom was 47%! The dollars invested through your automatic investing schedule during this 22-month average period will experience rapid recovery after the market finally does reach bottom.
Throughout this article, we have purposely not addressed selling high. Remember, the psychic didn’t have the opportunity to pick a high. This is because picking a high implies selling. Given the fact that markets rise significantly over long time periods, the better phrase for long-term investors is to buy low and hold tight for a long, long time. I’m 100% confident that if my future 70-year-old self is given an opportunity to buy a piece of American business at current rates, I would buy as much as humanly possible. Phrased differently, this same offer made to my 70-year-old dad would give him the opportunity to buy the S&P 500 for $102. As I write, it’s trading at $2,914.
“This time, it’s different” are the most expensive words in investing, according to famed investor Sir John Templeton. Current times are scary. They’re complex. I will not deny that. The fact is these circumstances are giving patient, long-term investors a deal on America’s future economic growth. It can be that simple if we let it.
Answering our initial question, how do you buy low, turns out to be simple. The answer is to always be buying. Establish an automatic investing schedule and stick with it. When markets are suppressed, as they are today, remind yourself that the dollars invested are increasingly valuable to long-term investment success. Remind yourself that rebounds happen, and over the long run, America endures. It always has and it always will. Whoever has bet against this in the past has lost — every time. Your future self won’t care if you picked the exact low. She or he will thank you for stepping onto the field and staying in the game.
