Down Stock Markets Present Bargains to Long-Term Investors
Down stock markets are not fun for most investors. Falling prices make people anxious; no one likes to see the value of their stock portfolio go down.
But it's normal for stock markets to "correct' from time to time and down markets can have benefits for long-term buy-and-hold investors, particularly those investors who are relatively young and accumulating shares for retirement.
For example, in an inflationary period where prices of goods and services go up, most stock prices go down. Therefore, long-term investors can buy many stocks at bargain prices. If a few months ago a stock traded at $100 per share and now trades at $80, that could be a bargain as long as the fundamentals of the company have not changed to cause the drop in price. This is particularly true for stocks with long-term earnings growth and upside price projectories. Think PepsiCo (PEP), Coca Cola (KO), Proctor & Gamble (PG), Colgate-Palmolive (CL) and Johnson & Johnson (JNJ). These dividend-paying stocks, which I have owned for years, have multi-year records of price appreciation, increasing dividends, and expanding product lines. Other buy-and-hold stocks to buy at bargain prices include TJX Companies (TJX), Apple (AAPL) and Microsoft (MSFT).
Some investors will execute a buy program using dollar-cost averaging to buy stocks each month during a down market.
For dividend-reinvestment investors lower prices mean that you buy more shares with your dividends. As long as a company does not cut its dividend, down markets boost the total number of shares owned through dividend reinvestment.
A third benefit of down markets is that poorly run companies and companies with fad products usually lose favor with investors so that money no longer flows to them. Instead, money goes to the stocks of companies that produce worth while products and services thereby pushing up their stock prices.
Unless the down market is caused by an extreme calamity that severely limits economic activity for years or decades, the stock market will rebound from a correction and long-term investors will see their stocks rebound. The correction in prices may have been painful in the short run but in the long run price these downsides can be great buying opportunities.
So what's the take away? Fluctuating stock prices are normal over the course of many years. It always feels better when prices are going up, but the best bargains often occur when price are falling. Long-term investors who are accumulating shares of great companies should be patience, stay the course and keep buying stocks. In the long run you should be well rewarded.
P.S. I do not consider cyclical stocks (repeated pattern of price upside followed by price downside) to be appropriate buy-and-hold candidates for a long-term stock portfolio. However, cyclical stocks like semiconductors are appropriate for short term trading because of their somewhat predictable upside and downside price pattern. Also, I don't consider financial assets like cryptocurrencies to be long-term investments. Because of their extreme price volatility, cryptos are the ultimate speculative asset. And speculation is the not the same as investing. Speculation is great for traders who are looking for short-term gains. But speculation is not a prudent buy-and-hold strategy. Because future crypto prices are based on what the next buyer is willing to pay and not on a sound mathematical analysis, there is no way to reliably project the path of future crypto prices. Rather than rigorous analysis, supposition (uncertain belief) and wild price projections seem to be the favored argument for higher crypto prices in the future. If you decide to buy cryptos, allocate a relatively small percentage of your money to them relative to your other long-term investments.