Market woes — now what?

In late February, the United States stock market took a bunch of blows, as — among other things — investors worried about the impact of the novel coronavirus on the world economy. The S&P 500 was down more than 10% at one point, and may be down more by the time you’re reading this.

It’s jarring to see investments plunge in value by 10%, 20% or even more. (The U.S. stock market, as measured by the S&P 500 index, dropped a whopping 38% in 2008!) But should you freak out? Not if you’re a long-term investor. Remember, this is how the stock market works. Indeed, since 1950, the S&P 500 has dropped by 10% or more dozens of times. It tends to happen every couple of years.

Sometimes such events are short-lived; other times they mark the beginning of a recession that can last several years. Still, every decline in the past has been followed by an eventual recovery, and the stock market has gone on to hit new highs.

Super-investor Warren Buffett has explained why savvy investors aren’t rattled by market downturns: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the (stocks) they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.” (Ideally, they’ll have some cash on hand with which to snap up great stocks at bargain prices.)

If this short piece isn’t enough to calm your nerves, spend a little time reading some classic books on investing. Look for titles by John Bogle, Peter Lynch, Joel Greenblatt, and The Motley Fool’s David and Tom Gardner.