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- It’s not easy to watch the markets fall, but investors with a long-term time horizon can handle the volatility.
- Keep investing on a regular schedule and remember that the best days almost always follow the worst.
- SmartAsset’s free tool can find a financial adviser to help build you a better investing strategy »
As investors during a market downturn, it’s hard to remember why we agreed to take on such risk.
The stock market draws the most attention on its very best days and very worst days, but there’s one surefire way to make investing worth your while: Stick it out through the good and the bad.
If you’re investing for a long-term goal, don’t panic. Here are three reasons to keep investing, even in the worst of times.
1. Dollar cost averaging is effective in market downturns
If you defer some of your salary into a retirement plan at work or make monthly deposits into a brokerage account, you’re already using a form of dollar cost averaging. It’s an effective investing strategy that not only protects you from price volatility, but keeps you disciplined. It works particularly well when you don’t have a big lump sum of money to invest.
By putting a fixed dollar amount into the same investment every month, you’re buying into the market regardless of where prices are. This eliminates the tendency to “time the market” and invest emotionally or speculatively. Over time, you’re buying more shares of a stock at a lower price, which translates to more returns when the market inevitably rises again.
2. The best days in the market often follow the worst
To reap the biggest gains, you usually have to be invested at the lowest points. And they happen more often than you might think.
A 2018 note from investing giant Vanguard said that every two years since 1987, there’s been one “attention grabbing downturn” in the markets. To sit on the sidelines during each of these downturns would mean missing out on some of the most profound price rebounds. Put another way, you have more to lose by bailing on the market than you do by riding it out.
That’s not to say it’s easy to watch the downfall, but you can (attempt) to rest easy knowing there are wealthier days on the other side.
3. Your long-term goals can handle it
The stock market serves a very specific purpose for the average investor; usually, to grow a pot of money to use at a specific point in the future.
If you’re saving for a big, important goal — retirement, your kids’ college tuition, a new house — and it’s more than five years from now, your investments will more than likely recover. That’s why buying and holding a portfolio of diversified investments is effective for most long-term investors.
Take it from Warren Buffett: “Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
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