With only the occasional short-lived reprieve, since the beginning of this year investor worry has grown as stocks have lost ground. The CBOE S&P 500 Volatility index — often referred to as the market’s “fear gauge,” or VIX — has risen to a multi-month high. Often, once such an extreme level is reached, it precedes a full-blown market correction that catapults the VIX to a multi-year peak. Investors are understandably nervous about what it all means right now.
If you’re one of these nervous investors, here are three important things to remember.
1. None of this is actually all that unusual
Although it feels like it’s been a while since the stock market has seriously struggled, sizable setbacks aren’t actually all that uncommon… even in the middle of bull markets.
Data compiled by mutual fund company Fidelity puts things in perspective, indicating that the S&P 500 (^GSPC 1.15%) has suffered at least one setback in excess of 5% in all but three years since 1980, while in nearly half of those years the S&P 500 took a tumble of 10% or more. Fear (as measured by the VIX) soared each and every time it happened.
Yet each time it happened, the market eventually reached new record highs.
2. Yes, this is a buying opportunity
And it’s that last highlight that should inspire nervous investors to reframe their view of what’s happening right now — the fact that every single pullback the market’s been through since its existence has been a buying opportunity.
This presumes, of course, you’re thinking long-term. If you’re only looking to plug into the market’s next near-term bullish swing or short-term bounce, you’re arguably playing with fire.
3. Just don’t get too picky about price
Why’s that? Because timing the market is difficult enough to do in any time frame, but it’s practically impossible to do with any successful consistency in the short run.
There’s certainly always a timing “guru” out there that will suggest otherwise. They’re usually selling access to their secret algorithm, though; just check their track record. There’s a reason that even most ordinary mutual fund managers underperform their benchmark indexes.
Image source: Getty Images.
It’s true! As Standard & Poor’s ongoing analysis of large-cap mutual funds available to U.S. investors indicates, over the past five years, 89% of these funds underperformed the S&P 500. For the past decade, the number exceeds 85%. It’s a testament to the difficulty of trying to perfectly time the entry and exit of any trade — a struggle verified by the persistent underperformance of most hedge funds.
The point is, holding out for the exact market bottom is likely to do more long-term harm than good simply because you’re not likely to know when and where the ultimate bottom is being made. Just buying quality stocks while they’re down from a major high at any price is rewarding enough in the long run.
This might help inspire you to not overthink it: exchange-traded fund (ETF) giant Invesco calculates the market’s average time to recover from a pullback of 5% to 10% is a mere three months, while a correction of between 10% and 20% only takes an average of eight months to unwind. Even if you’re just capturing a decent-sized chunk that recovery, you’re doing well enough, and possibly better than most.
