The September effect appears to be in full swing, as major market indexes have struggled during this historically slow month.
The S&P 500 (SNPINDEX: ^GSPC), Dow Jones Industrial Average (DJINDICES: ^DJI), and Nasdaq Composite (NASDAQINDEX: ^IXIC) have fallen by 1%, 3%, and 0.3%, respectively, over the last two weeks, as of this writing. A rate hike from the Federal Reserve, stubbornly high oil prices, and AI concerns have put pressure on stocks, and a rattled bond market has renewed recession fears.
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While all of these headwinds don’t necessarily mean a bear market is around the corner, it never hurts to prepare. And according to Warren Buffett, an upcoming downturn could be a lucrative opportunity for smart investors.
Bad news makes for smart buying opportunities
In 2008, Buffett wrote an opinion piece for The New York Times. The U.S. was about a year into the Great Recession at the time, and many investors were deeply discouraged. However, Buffett reassured investors that all recessions are temporary and that the good periods outlast the bad.
He added that the best buying opportunities arise during market downturns, when stocks are far more affordable.
“[I]n the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank,” he noted. “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”
The most lucrative strategy, according to history
Bear markets are daunting, but decades of history prove that “buying the dip” can set you up for lucrative long-term returns.
When Buffett offered this advice in October 2008, the S&P 500 had plunged by nearly 40% over the past year, and it still had more to fall before bottoming out in 2009. Yet if you’d invested in an S&P 500 ETF in 2008, you’d have earned total returns of more than 1,000% by today.
On the other hand, say you’d decided to sit out of investing until, say, March 2013 — when the S&P 500 officially reached a new all-time high and entered a bull market.
At the time, that may have felt like a much safer time to invest. The recession was over, stocks were steadily climbing, and the market had plenty of potential still ahead. Yet by today, you’d have only earned total returns of around 518%.