The Upside of a Falling Stock Market

The following is a guest post

The global stock market has experienced a rapid downturn in the last ten days. The slump has sounded alarm bells on the state of the world economy. It has also given investors in the stock market a headache, due to uncertainty. 

The situation has different effects on different investors. For example, an investor who is about or at retirement might consider risking less. However, if you are an investor that has a long way to go before retirement, a sharp recession in the stock market should not scare you away from investing.

As the more experienced investors usually advice, the worst thing an investor can do is to sell. When the market is experiencing a slump, it is the best moment for you to increase the amount of money you save.

The stock market normally goes up

You need to note that, even though the stock market is unstable from time to time, the general trend is firmly upward. A good example is the US stock market that has never gone down in over 20 years.

This is a reflection of the fact that the economy tends to grow over time, and as a result, corporate profits also grow. As an investor, if you have a varied portfolio of stock, you will have a slice of these profits.

The short-term wavering of the financial markets has also provided a real-time indicator of what people perceive of the future. The outbreak of the novel Corona Virus beyond China has led to a considerable drop in the stock market. This is an indicator that people with money think the economy of the world will plummet into a recession.

The Coronavirus has been declared a global pandemic by the World Health Organization; hence it is likely to hurt the economy. However, there is no reason to believe that the epidemic will have a significant impact on the state of the world several years from now. No matter what happens, the economy, together with the stock market, will recover.

It’s an excellent time to buy low

One characteristic of the stock market is it discounts the future. The market worries more about the next quarter or year than the next seven or ten years.

From a more technical perspective, when a market has boomed for a while, the probability of an additional boom is low. On the other hand, when it has had a recession, there is a high likelihood of a boom. This theory does not work in the short term view of the markets; it requires you to look at it in the long run. The market always goes up.

It is, therefore, a great time to buy stocks when they are on the low. The stock market recession has also affected other industries; for instance, interest rates for mortgages have gone down, meaning you can buy your dream house at a more favorable price than in the pre-corona virus era.

The mindset of fear triggered by the sharp decline in stock markets is an economic problem in itself. We must step back and think things through. There is still a bright financial future despite the corona virus-induced slump.

One thought on “The Upside of a Falling Stock Market

  1. “One characteristic of the stock market is it discounts the future. The market worries more about the next quarter or year than the next seven or ten years.”

    Love this! It summarizes things perfectly. The thing that I don’t necessarily like is how the Fed seems to not like any drop in the market. It is as if they perpetually want it to go up! There are only a few scenarios (like likely in the global financial crisis), which legitimately needed a government backstop. Otherwise, we should really just let the free markets play out.

    Scott

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