Why a losing stock market can be a win for investors
After Wall Street lurched to its worst-ever start to a year, investors are understandably wary about the months ahead.
Stock market analysts wearing their fortune-teller hats have done little to quell that fear: Predictions vary, but many expect a performance that is, at best, in line with 2015, when the S&P 500 had a series of ups and downs before closing nearly flat for the year. A few are expecting much more dreary results.
But even with the year’s dismal beginning, what the stock market has in store for 2016 is anyone’s guess — and for long-term retirement investors, it shouldn’t matter.
“I like to say the market breathes in and it breathes out,” says Gary Alt, a financial advisor at Monterey Private Wealth in California. “What we’re looking for is a marathon, not a lot of sprints. Slow, steady growth is better for investors.”
In fact, investors who are in it for the long term can benefit when the market breathes in — down periods, in other words. Here’s why.
The market appears to be fairly valued
If the economy remains strong, any fluctuations this year are likely to be short-term, emotional reactions from which the market will bounce back.
“In terms of valuation, [the market] is right about where it should be. What that means for investors is that they shouldn’t fear that the market is overvalued and we’ll have a fundamental correction,” Alt says. “There are temporary pullbacks that occur, but those are great opportunities to get into the market or put new money to work.”
Corporate earnings are expected to rise 7.6% from 2015 levels, according to forecasts from Factset Research. “If earnings are going to grow at that rate and the market were to stay flat, that just means the stock market is becoming a better value,” Alt says.
Why? Because when a company is earning more per share but the market is flat, investors are paying the same price for shares that are now worth more.
“Remember, in the short term the stock market can react emotionally, but medium- and long-term it moves based on fundamental measures such as earnings per share and expected economic growth,” Alt explains. “As of today, the fundamentals look healthy.”
When the market is down, you can buy on sale
Most retirement investors use a strategy called dollar-cost averaging, even if they don’t realize it: They invest a set amount of money on a regular basis, no matter how the market is performing.
This strategy has benefits, and one of the biggest is that during down markets, your money goes further — you’re able to purchase more shares for the same amount of money.
Even when the market is fairly flat,“you’re still buying at a decent price, which will help you in the future when the market starts to grow again," says Bob Stammers, the director of investor education at CFA Institute, a worldwide association of investment professionals.
If you have extra cash, a downturn is an opportunity
If you have money on the sidelines (even as little as $500) or room in your budget to increase 401(k) or IRA contributions, you’ll want to look for opportunity in those market pullbacks.
“Unless there’s some fundamental change in the market — something has happened — it’s a sentiment change, and that should be a buying opportunity for people,” says Stammers, “especially if you’re buying diversified vehicles, like funds. As the market moves lower, you’re going to be getting some deals.”
Take advantage by simply buying more of the mutual or index funds you already invest in or, if you’ve done some research and see value in a particular asset class, add it to your investment mix.
Your strategy shouldn’t change
Retirement investors should set a plan and stick to it, because day-to-day fluctuations matter very little over a long time horizon.
“Even when you look at 2008, when we saw a big drop, the people who got hurt were those who got out of the market and then got back in when it recovered,” Stammers says. “Those who stayed put — and, in some cases, bought more — did well or extremely well.”
Fidelity data show that investors who stuck it out between September 2008 and March 2010 saw their account balances go up by close to 22%, despite the market struggles. Those who fled the market at the end of 2008 or beginning of 2009 and stayed out through March 2010 lost an average of close to 7%.
“The key here is to not divest, to not get fearful,” Stammers says.
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Arielle O'Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.
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