Does the market’s recent weakness have you nervous about its foreseeable future? If so, you’re not alone. All prolonged pullbacks start with that first small step that looks like this one. You might be tempted to pare back your exposure to stocks until things look more certain.
That may ultimately be the wrong strategic move, though.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Admittedly, it might be uncomfortable to remain invested right now. This bull market has gotten a bit long in the tooth, after all, and even if this isn’t the beginning of a bear market, we’re certainly overdue for a correction.
You’re still arguably better off simply staying the course, however, even if it means taking some lumps. In fact, you might want to make a point of pouring some fresh cash into the market sooner than later.
But first things first.
By the numbers
If this is only a routine market correction, numbers from investment management outfit Invesco offer some relief, indicating that it only takes an average of three months for the market to bounce back from a tumble of between 5% and 10%. The recovery from setbacks of 10% to 20% takes slightly longer, but at an average of eight months, most investors can still comfortably ride it out. And, given that it’s practically impossible to know when and where a correction’s bottom will land, there’d be little upside in bailing out now with plans of piling back in once the worst is over.
Indeed, mutual fund company Hartford even tested what would happen if you invested $2,000 in the S&P 500 (SNPINDEX: ^GSPC) every time it fell 8% from a peak. Starting in 1986 with $10,000 worth of seed money already allocated to the index, your net returns would be nearly twice what you’d have by not adding more to the portfolio during major market dips.
Even if the recent stumble does mark the beginning of something more, though, there’s no call for long-term investors to change their tack.
As with corrections, there’s no way to know when a full-blown bear market has run its course. We only know, as brokerage firm Charles Schwab notes, they last an average of about a year, and take about as long to recover from.
That’s a long time to be sure. Nevertheless, the smart-money move is still to stay the course and stick with quality stocks. That’s because we can’t know when bear market bottoms form.