It’s been a minute since we’ve seen a stock market dip like this one. For the year so far, the major indexes — the S&P 500, Dow Jones Industrial Average, and the Nasdaq 100 — are all down more than 9%.
Times like these can prompt you to doubt your investing approach, or even pause investing temporarily. But both responses work against you. Doubt clouds your decision-making. And an investing pause intended to prevent further losses can easily backfire.
Get your confidence back with these four reasons to continue investing through this stock market dip.
1. You don’t need the money right now
When do you plan to use the money locked in your investment account? If the timeline is five years or more, you’re well-positioned to keep investing.
This is because the market moves in cycles. It goes up, down, and then up again. Notably, the downcycles often don’t last longer than five years. If you can wait out that five years without liquidating shares, the downturn can end up being mostly irrelevant. Your portfolio will simply return to growth.
For context, the average duration of a bear market is about two years. Two extremes embedded in that average are the five-year bear market that started in 1937 and the Coronavirus-prompted crash that reversed in two months.
2. You can afford to wait
Your timeline defines when you plan on spending your investment wealth. But your cash savings often dictate how long you can afford to wait.
If you don’t have cash on hand, you may have to reach into your investment account to cover emergency expenses. That’s not ideal when share prices are down. The liquidation will generate less cash than you want. It’ll also leave you with fewer shares, which lowers your growth potential in a recovery.
Compare your cash balance to your monthly living expenses. To keep investing comfortably in this market, you should have enough cash to stay afloat for three to six months. If you’re short of that benchmark, save extra money in a cash account for now. You can shift back to investing once you have that cash cushion in place.
3. You are comfortable investing in value
When the market struggles, share prices drop across the board. Stocks can lose value even when there’s no fundamental change in the underlying business models.
For good companies that keep making money when the market or economy is down, a dip in share price can be a buying opportunity. It’s akin to buying last season’s designer coat on sale. The company is largely the same, but the price you pay is lower.
Billionaire investor Warren Buffett put this idea into practice in the first quarter of this year. The famous investor took advantage of lower prices on Apple (AAPL -3.83%) to buy more than 3.7 million shares. Apple is one of Buffett’s favorite stocks — it accounts for more than 42% of his portfolio.
Keep in mind that this logic doesn’t apply universally. Some companies do suffer under temporary external circumstances. Your job is to understand how long any suffering might last, and how that aligns with your investment timeline. A quarter or two of lackluster earnings could be irrelevant when you measure your timeline in years or decades.
4. You believe in recovery upside
The cheaper shares you buy today have huge upside potential in a recovery. To realize that upside, though, you must be confident enough to wait for it — even when it seems like no one else is.
It may help to remember that the stock market has always recovered from downturns. History doesn’t guarantee the future, of course. But the market has shown its resilience time and time again. And the investors who stay invested for decades are often the ones who benefit most.
Positioned for growth
If your finances are strong and you’re willing to wait for a turnaround, you’re in a good place to keep investing through this market dip. The strategy takes some emotional fortitude, but there is upside. You’ll pad your share count for less and position your portfolio for growth when this market turns around.