Here's Why You Should Invest Even When the Market Is Down

Authors: Lyle Daly

Source: The Motley Fool

A volatile stock market can be worrisome, especially for new investors. When the value of your portfolio has dropped, you may be unsure about continuing to put in more money. You might even want to cut bait and sell your investments entirely.

While this is a normal reaction to a down market, it's one that every investor needs to learn how to get past. Experienced investors know that it's important to continue investing when the market is down. In fact, it's one of the best money moves you can make.

Why you should invest when the market is down

Stocks, and the stock market as a whole, go through ups and downs. These are often due to the economy and not necessarily related to a stock's underlying value.

Ramit Sethi, who stars in How to Get Rich on Netflix, recently shared a smart reason why you should continue to invest when the market is down. As he put it, "When the price of something you want goes down...you're happy about it!" If a product you love went on sale, you'd probably take the opportunity to buy it at that lower price.

It works the same way with investing in stocks. If you believe a stock is a good long-term investment, you should invest in it regularly. If the price goes down, don't look at it as a bad thing. Look at it as an opportunity to get more for your money.

Even if it feels risky, the reality is that the most successful investors end up making money by investing during down markets. What you shouldn't do is stop investing. If you only invest when prices are going up, you'll make less money overall. And you definitely shouldn't panic sell your investments. Once you sell, you lock in your losses, and you'll miss out if those investments bounce back.

How to choose quality long-term investments

The key to making this work is to choose investments that you believe will be successful over the long haul. That way, you can continue to invest with confidence no matter what the market does.

Despite what some people believe, your investments don't need to be individual stocks that you pick yourself. They certainly can be, if you want to build your own portfolio. But there's also a much simpler option that can be just as effective -- investment funds. These put your money in a large number of stocks, bonds, or both, giving you a diverse portfolio in as little as one investment. Options include: 

·       Exchange-traded funds (ETFs)

·       Mutual funds

·       Target date funds 

To give you a firsthand example, I've been investing in a total stock market mutual fund for years. It distributes my investment across the entire U.S. stock market. During the time I've invested in it, the price has fluctuated quite a bit.

No matter the price, I've put money in it every month. I know that historically, the stock market has produced an average annual return of about 10% (before inflation, that is). Even though nothing's guaranteed with investing, I'm reasonably confident that over the long term the stock market will keep going up. So, when the market is down, I just look at it like I'm getting more for my money the next time I invest.

This article was written by Lyle Daly from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.