But the crash of last year, when the market pulled back by 33% in just a month, demonstrated some valuable lessons about investing. Here are three reasons not to be worried about a stock market collapse.
1. Patience is rewarded
From Feb. 2020 to March 2020, the market collapsed by 33%. That is a jaw-dropping fall and represented one of the fastest decline in U.S. history. But it was also among the shortest bear markets, as the market regained its previous value by Aug. In under six months, the losses had been removed — and gains made.
Just a year after, the S&P 500 was near 4,100. That’s an 83% gain from the low on March 23, 2020. So, if you dumped your stocks after that collapse, you not only made your losses permanent, but also missed out on gains that you would have gotten if you were patient.
2. Buying opportunities
Warren Buffett has a famous saying: Be fearful when other investors are greedy, and greedy when other investors are fearful. In other words: Seek out opportunities to buy good stocks when others are fearfully selling stocks because that’s where the best deals will be found. For example, last March, Walt Disney stock went down almost 40% from Feb. to March, when it reached a low of $85 a share.
Clever investors jumped on this stock when it was selling that low, because they understood the entertainment giant would be back in a major way. By November, it had reached $140 a share, returning to where it was before the crash. Disney stock is now trading at nearly $171, which is double its low point in March of last year.
3. Long term
When bears growl, it can be scary. But just like coming across a real bear, you should walk away slowly and not do anything in a rush. There is no need to react to a short term bear growl, because you should be thinking long term.
Many bear markets over the years have been categorized as drops of 20% or larger, and more have been 10% or larger. Yet the S&P 500, through all this, has had an average return of 8% per year over the previous 30 years. Over the past 10 years, the benchmark has returned to nearly 11.8% on an annual basis through May 13.
Market corrections are hard on the nerves, but you need to keep these three pieces of advice in mind, and if you do, you will get much better sleep and portfolio returns.