Stocks Have Been Falling. I’m Still Buying Steadily.

Big stock market losses are nobody’s idea of fun. But they have been happening this year with dismaying regularity.

It’s not just a bad day or a bad week. The S&P 500 has fallen seven weeks in a row and Friday briefly entered bear market territory, Wall Street jargon for a decline of at least 20%. If you are a long-term investor, you may not want to look at your portfolio right now. The numbers may be unnerving.

But I have no choice. I look closely at this data all the time as part of my job, not just at the overall markets but at my own returns from a portfolio made up overwhelmingly of low-cost, diversified index funds that track the total stock and bond markets. What I’m seeing is ugly.

What am I doing about it? Buying more stocks and bonds through index funds.

This isn’t an attempt to make a smart bet that the stock market has already bottomed and is about to start a powerful rally. I have no idea if any of that is true. I’m just continuing with investments I’ve been making for decades, despite the market’s often obnoxious behavior. My long-term investment numbers are pretty good, even though the short-term results are painful.

Readers have been sending me questions about investing. Please keep them coming. Many have asked whether this is a good time to buy stocks or to sell them — whether it’s wise to get back into the market now after fleeing during this year’s downturns or whether it’s time to get out of the stock market entirely.

Pay the Bills First

I’ll do my best to answer, but, first, it’s important to state that there is no single solution for everyone.

The losses I’ve been enduring would be unsupportable for many people. For those unable to withstand market declines or without the time to recover from them, a more cautious approach would definitely be more appropriate.

I wouldn’t make any investments in the stock market at all — really, none at all — if I needed that money for daily expenses or for an important goal like buying a home or paying for education or medical expenses in the next several years.

As I said in last week’s column, first, I’d make sure I had enough money to withstand an emergency. I would keep the funds I really needed in a safe place, including I Bonds, which are paying 9.62%, a rate that adjusts with inflation. Or try short-term Treasury bonds, high-quality corporate bonds or a bank account.

What I’m about to recommend makes sense only if you are able to engage in a consistent investment plan with a long horizon.

But, yes, if you clear all those hurdles, I do think this is a perfectly good time to put money into stocks as well as bonds, which have also declined in value this year. And unless I really needed the money now, I wouldn’t sell. I would buy.

Note, though, that I also believed that last year, when the current downturn was months away. That’s because, as I see it, investing in the stock market is a long-term endeavor that involves some risk. Where the market is heading day to day has nothing to do with it. If anything, the current market decline is an opportunity for those who can handle it.

Is It Time to Get Back Into the Market?

Deborah Carley of Big Rapids, Michigan, wrote that she and her husband had been making regular investments, including in a low-cost S&P 500 stock index fund — until the stock market shifted this year.

“We were planning to continue to invest in them monthly but have stopped doing so due to the markets’ downturn,” she wrote. “Should we continue to invest in them in the eventual hope of the markets’ upturn?”

In a telephone conversation, Carley explained that she and her husband were retired and, crucially, had enough income for their foreseeable needs. As investors, using money they don’t need to count on soon, they are willing to take some risks. They are holding on to their existing investments, for example, and are even thinking about putting some money into companies that mine lithium, a critical component in batteries for electric vehicles.

But does it make sense to invest in stocks now, she asked?

I explained that I couldn’t give advice about buying particular stocks and instead favor index funds of the kind she already owns. Those funds eliminate the risk of owning the wrong specific stocks at the wrong times. Index funds that track broad markets have provided an easy and inexpensive way for ordinary investors to capture the overall returns of the financial markets since John C. Bogle made them widely available at Vanguard in 1976.

But with the stock market in a broad decline since the beginning of this year, and bonds falling as well, that may not seem to be saying much. Despite occasional rallies, the S&P 500 is down 18% for the year. Bonds have lost money, too. My personal portfolio, which includes bonds as well as stocks, has lost about 13% .

Ouch! I’m not happy about that.

But I accept that I can’t predict the market’s short-term movements.

Then again, nobody can do that consistently. Despite all the words written and spoken on the subject, they don’t amount to real knowledge.

Lessons From Financial History

“Where’s the market going tomorrow? We have no idea,” Savina Rizova, head of research at Dimensional Fund Advisors, an asset management firm, said in an interview Tuesday.

Dimensional does not attempt to make short-term bets, she said. Nonetheless, she said, finance does suggest what is likely to happen in the markets over extended periods of 10 or 20 years or more.

“We know from history that there are higher expected returns from stocks than Treasury bills or cash,” she said. Because day-to-day returns are unpredictable, if you attempt to move in and out of the market at the perfect time, you are likely to miss some of the market’s biggest days. They can occur at any moment, even during long downward periods.

Dimensional looked at the S&P 500 from Jan. 1, 1990, through December 2020. It found that $1,000 invested in the index produced these returns:

— $20,451 if you were fully invested for the entire period.

— $18,329, if you missed the best single day over those 31 years, a gain of 11.6% on Oct. 13, 2008.

— $12,917, if you missed the best five days.

— $7,080, if you missed the best 15 days.

— $4,376, if you missed the best 25 days.

Based on numbers like these, Rizova said, it makes sense to deploy money in the stock market as soon as you can. “You could miss out on a big day, and if you miss those, you’re missed a lot of the upside,” she said.

How Likely Are Losses?

On the other hand, behavioral economics tells us that humans tend to fixate on losses more than on gains.

Jane Johnson of Atascadero, California, wrote that she and her husband, who are recently retired, have some money to invest for the long term, perhaps for their children’s benefit. But in a phone conversation, she said, “I would hate to put it all in the stock market and see it go down.”

I asked Roger Aliaga-Díaz, chief economist for the Americas and a principal in the Investment Strategy Group at Vanguard, for advice in this kind of situation. “You may want to invest the money gradually, rather than do it all at once.” That practice is known as dollar-cost-averaging, and it is what you do when you invest regularly through a workplace retirement account. “When the stock market falls, you get a better price,” he said. “And, behaviorally, the gradual approach helps a lot of people stay in the market.”

Another way to look at the problem is defensively. What is the probability that you will lose money, based on the history of the U.S. stock market? The flaw in the historical approach is obvious: The future may not resemble the past, and it is definitely not a guarantee of future returns.

That said, I find a degree of solace in these S&P 500 statistics, which go back to 1929. Bank of America compiled them in 2021 to illustrate the perils of moving in and out of the market — what is known in finance as market timing.

From 1929, it found, the likelihood that you would have lost money by investing in the S&P 500 declined as the time horizon grew. On any given day, the index declined 46% of the time — just a bit less than you would expect with a flip of a coin. Over one year, though, losses occurred only 26% of the time, and that dropped to just 6% by 10 years.

Over 20-year periods, the U.S. stock market has not had a net price decline. Again, the next 20 years could be different, and you could lose money in the market. That’s an important reason for holding high-quality bonds — probably, a higher proportion of bonds as you approach the moment when you may need to rely on that money.

More Comforting Numbers

I’ve been fairly negative so far, but consider this: Even if recent losses have been terrible, over the last decade or two, the long-term returns are far more comforting.

I used the website of Morningstar, the financial research company, to calculate the growth of $10,000 in the Vanguard S&P 500 index fund for the 20 years through Tuesday.

I came up with a gain of 429.6%. That means that $10,000 stashed in the S&P 500 index fund in May 2002 is now worth $52,959.66. The only catch is that you would have had to hold onto those shares through that entire period, including years of terrible losses, like the ones we are experiencing now.

Forgetting about the news entirely is one way to do that, as I suggested recently. But another is to try to understand the risks and rewards and stick with a long-term plan. That is what I’ve been trying to do. It might work for you.