Investing
Buying During Market Drops Has Consistently Outperformed Sitting on the Sidelines
By Bear Creek Staff, . Bear Creek Capital Network.
Investors who kept buying through market downturns consistently came out ahead of those who paused, according to The Motley Fool, citing Fidelity data on S&P 500 performance going back to 1980.
What the numbers show
The S&P 500 fell 10% or more in 48% of calendar years since 1980, according to Fidelity figures cited in the piece. Despite that frequency, the average calendar-year return across the same period was 13.3%. The implication is that corrections are a normal feature of the market, not an exception, and that investors who stayed the course were rewarded over time.
The cost of pausing
The piece walks through a straightforward illustration. Say the S&P 500 falls 20% over one calendar year, then fully recovers the following year. An investor who holds existing positions but stops adding new money ends the two-year period with a return of zero on those contributions: a round trip back to the starting point. An investor who kept making regular purchases throughout the decline would have bought shares at prices below the prior peak for the entire period, leaving every one of those purchases in positive territory once the index recovered.
That gap, between zero and a positive return on two years of contributions, is the practical cost of stopping periodic investments during a downturn.
Why most investors get this wrong
The behavioral problem is straightforward: selling after prices fall feels defensive, but buying when prices are falling requires acting against the crowd. Most investors, the piece argues, lack the willingness to add money when sentiment is worst, which is precisely when the opportunity is largest.
This is not a novel observation, but it is one the data keeps confirming. Corrections create discounted entry points. Investors who treat those discounts the way they would treat a sale on any other purchase, as a reason to buy more rather than less, tend to benefit when prices recover.
What to watch
The analysis here rests on one critical assumption: that the market recovers. For broad index exposure to the S&P 500, that assumption has held across every correction in the historical record the piece draws on. It does not hold for individual stocks, sectors or concentrated positions, where a decline can be permanent rather than temporary.
The practical question for investors right now is not whether a correction is coming, it is whether their investment plan is built to keep running through one. A plan that depends on favorable conditions to stay active is not really a plan. Investors who have not tested their own tolerance for adding money during a drawdown should do that before the next one arrives, not during it.
Bear Creek Capital Network publishes content for informational and educational purposes only. Nothing in this article constitutes financial, investment, tax or legal advice, or a recommendation to buy or sell any security. Consider your own circumstances and consult a qualified professional before making financial decisions.