Bad Markets Make Good Friends

Well… the seesaw continues in the markets – with the Dow down 100 points one day, up 100 points the next… a fall, inevitably followed by an equal rise…  and funnily, it’s often the same news that causes swings in both directions. For example, the European sovereign debt crisis often leads to sharp market declines, and that very issue – but with a positive spin – leads markets higher… pretty amusing, if you can see humor in such things.

And who can say where the markets are headed… because the bulls and bears are in a constant tug of war, violently jerking control away from one another, to and from.  Currently, many pundits believe the markets could tank even further and there’s a lot of media chatter about economic weakness, the fiscal cliff with the Bush tax cuts expiring, etc.

So let’s assume for a moment that the bears win-out in the near term. Then what? Does that spell the end of your retirement portfolio… and your way of life as you know it?

On the contrary… a downturn could be just the thing you need to get your portfolio back on its feet. Here’s why:

Bad markets may make you feel terrible and take your portfolio to new lows… but they also make you the most money because a down market is a great opportunity to buy good companies at great, bargain-basement prices. Over time, such stocks deliver astounding returns when the market recovers, as it inevitably does even from its darkest depths and often within a few years – sooner than predicted. So, as long as you keep buying through downturns, stay invested for the long run, and do not exit, time or otherwise attempt to outsmart the market – you could do very well by simply buying low, holding long enough, and selling high.

Related: Your Best Bets for Investment Returns

The pundits keep saying to succeed at investing, investors must climb a wall of worry. What that means is that when markets are down and your portfolio is all beaten up, it is only natural to get disenchanted. This is also the time when your loved ones may chastise you for not getting out of the market when the going was good (believe me, many investors have been on the receiving end of that line) and urge you to abandon the stock market because it’s resulted in colossal losses. At such times, anti-stock market sentiment is at its peak. And at very such times, it takes tremendous courage to stick to your convictions, to continue to see the big picture, to rationally understand that stocks are the best investment over the long run, and to keep on the path of regular investing.

In fact, while you are in the accumulating and savings phase, you should cherish bad markets, just as you cherish good friends – because they nourish you for long-term success.  The time to want high prices is when you are in the distribution phase – taking money out of your portfolio for retirement, college tuition, etc.

Now granted, at all points in time, there are folks in both categories – investing and withdrawing – so the key really is to keep investing through good markets and bad. What all investors must do is NOT abandon the stock market through highs or lows; when markets are high, you will find, by the very nature of a broadly diversified market place, sectors and assets that are underpriced when indexes are at or near all time highs – buy such underpriced assets! So, in a nutshell, consistently buy stocks at reasonable prices at all times, and diversify your portfolio with stocks that are not correlated with each other or the market.