How to survive when stocks behave badly

Where is the stock market heading? That can be an urgent question — especially when you are losing money in a fickle market.

As the wild stock market swings that started last week demonstrated, no one knows where the market is going, not hour by hour or day by day. What’s more, no one on Wall Street has been able to predict reliably where the market will be next month or next year, though plenty of people are constantly trying to do so.

Really, we are all in the dark, and when stocks are shaky, that is not a pleasant place to be. Yet there are compelling reasons to stay in the market.

A moment like this one, when the stock market’s perils are obvious, can be an opportunity — a time to figure out whether your investments are appropriate and to take action if they are not.

Stocks really have not fallen all that much — not when you consider how high they have gone.

Investor gains have been stupendous since March 2020, when the Federal Reserve intervened near the start of the pandemic and set off a bull market. Through Jan. 3, when the recent decline began, the S&P 500 returned 114%, including dividends.

Stock returns have been marvelous over much longer periods, too. Since March 2009, when the Fed intervened during the Great Recession, the S&P 500 returned 762% including dividends through Jan. 3. Go back a bit further and you will find that in the 50 years from the start of 1972, the S&P 500 returned more than 18,000%.

It may help to keep that history in mind when you contemplate the recent market storms: If you had put $10,000 in S&P 500 stocks at the start of 1972 and just left it there, it would be worth more than $1.8 million today.

The history of long-term market gains emphatically does not guarantee anything about future returns.

There is a dark side, too. Periods of excruciating losses known as bear markets are as much a part of stock investing as the far more enjoyable runs during bull markets. Losses much deeper than this month’s drop are virtually certain to occur if you hold stocks long enough.

Bear markets in the last 50 years included declines of:

• 34% from February to March 2020

• 57% from 2007 until March 2009

• 49% from 2000 until 2002

• 34% in 1987

• 27% from 1980 to 1982

• 48% from 1973 to 1974. I have owned stock through several of those miserable periods. It was not fun. But owning bonds helped to buffer the pain.

For the most part, highquality bonds, especially U.S. Treasurys, have performed well when stocks have declined. The more stocks scare you, the more likely it is that high-quality bonds will be soothing. Knowing that you own these reliable assets may even help you hold onto the stocks in your portfolio.

You can do this by owning a fund that contains both stocks and bonds, like targetdate funds, which are designed for people saving for retirement and tend to become more bond-heavy over time. Even simpler are indexed balanced funds, portfolios that track the stock and bond markets and maintain a steady allocation over long periods. Both varieties of funds rebalance for you automatically — meaning they achieve a desired allocation to stocks and bonds by selling stocks (or bonds) when they are high and buying them when they fall in value.

Portfolios containing both stocks and bonds tend to be far less volatile than pure stock investments. Diversified, low-cost, broad-based index funds, which mirror the overall market, are a much safer way to invest in stocks and bonds than buying individual securities.

If you pick the right stock — say, Apple — and hold it for decades, you will outperform any index fund. Since 1989, the numbers show, Apple’s returns are about 20 times greater than those of the S&P 500.

But picking and holding a stock like Apple from the beginning is exceedingly difficult. Apple was a miserable stock through much of the 1980s and 1990s. Would you have known to stick with it when it was near bankruptcy? I did not.

Furthermore, unlike Apple, roughly 96% of the securities in the U.S. stock market do not earn money for investors at all over long periods, according to research by Hendrik Bessembinder, a professor of finance at Arizona State University. Bessembinder has since found that in global markets, too, most stocks will not earn you money over the long run. Broad, low-cost index funds take care of these problems.