Investing in a Down Market

With the ramifications taking place from the covid-19 pandemic, the war in ukraine, paired with proliferating interest rates, the overall stock market is down tremendously from where it was at the start of this year. The S&P 500 index, which tracks 500 of the largest companies in the U.S. stock market such as Amazon, Google, and Coca-Cola, is down more than 50%. What are you supposed to do in times like this? Many people panic and sell at the bottom to prevent further losses, but according to the experts, what are you supposed to do? 

Legendary investor Warren Buffet, also known as the Oracle of Omaha, actually suggests that you shouldn't worry too much about market downturns. “I would tell investors not to watch the market closely,” Buffet said during an interview in 2016. What Warren means by this is investors who are constantly trading and trying to time market booms and busts do significantly worse in the long run. Buffett also noted later in the interview “The money is made by owning good companies for long periods of time. That’s what most people should do with stocks.” 

 

Down periods in the stock market are very counter intuitive. Most people have the natural human instinct  to sell their positions when the market starts to tank, but statistically speaking you should actually be adding to your position instead of selling. A great model to think about is when markets are down, stocks are actually on sale and you can get more shares for a cheaper price.  A great way to ensure you are always buying more shares when the market is cheap, is to consider using dollar cost averaging. This strategy is one of the more useful ones to use as well as very simple. All you need to do is invest a set amount of money in the stock market on a consistent basis. Over time you will purchase more shares when the market is down, and more shares when the market is more expensive.

 

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