When the stock market goes through a big drop and your portfolio’s value is going lower and lower, it can be difficult to know what to do.
It’s an emotional time and mistakes are common when we are feeling pressure.
What about my retirement?
My kid’s college education?
My dreams of financial independence?
Well, when the market takes a nosedive there are some things you should do, and also some things you absolutely, positively SHOULD NOT do.
And we can learn a lot by looking at one of the biggest business stories of the past 100 years…
If you were asked to name some of the biggest stock market winners of the past century, there’s a good chance Amazon would come to mind.
After all, Amazon has gone from a small online bookseller to one of the world’s largest, most powerful companies. In 2020, the company’s market value reached a massive $1 trillion.
Amazon now sells virtually everything… and its founder, Jeff Bezos, is one of the world’s richest men.
As result, Amazon’s shareholders have enjoyed one heck of a ride…
Amazon’s market value has increased more than 120,000% since its IPO in 1997. That kind of gain turns every $10,000 invested into a stunning $12 million.
You probably also know why Amazon achieved such huge success. Its Prime membership program was a big hit. Its mastery of logistics lowered the price of almost everything. Its cloud computing business generated billions of dollars in annual revenue.
What you probably don’t know is what the Dow Jones Industrial Average did on March 4, 2015… or what the Dow did on October 18, 2013… or what the Dow did on ANY specific day of Amazon’s incredible rise.
You also probably don’t know what mortgage rates were on December 12, 2003… or where the Federal Reserve had short-term interest rates set at on July 27, 2011.
That’s because what the stock market and interest rates were doing on those days didn’t amount to a hill of beans compared to what Amazon’s business was doing.
Recessions, bear markets, and stock market corrections made a lot of headlines but proved to be tiny speedbumps on Amazon’s path to success.
What the market did or what made headline news on any specific day is meaningless compared to the power of Amazon’s business model, the massive online shopping trend it rode to success, and the moves its management made.
What really mattered to Amazon shareholders wasn’t the broad market, interest rates, or presidential elections. What really mattered was that Amazon constantly innovated, delivered value to its customers, and outperformed its competition.
The same goes for every innovative, successful company you can think of: Apple. Disney. Starbucks. Google. Tesla. Visa. Home Depot. Nike. Chipotle. Netflix. Hershey. Microsoft. McDonalds. Costco. Airbnb. Lululemon. The list goes on and on and on.
What interest rates or the stock market did during the ascent of these companies didn’t matter at all. Even recessions, bear markets, and stock crashes didn’t matter. Who was president didn’t matter.
What mattered was innovation, massive industry trends, delivering value to customers, and smart business models.
Here’s why this is so important to you as an investor…
If you invest in stocks for the long-term, you are guaranteed to live through bear markets, recessions, and corrections.
These declines – even if they are in the modest 15% range – will scare you.
They will make you question the idea of owning stocks.
If you invest in stocks for the long-term, you’re sure to come across tons of “bearish” news and predictions.
There’s a whole industry of journalists and financial analysts who constantly predict the fall of America, runaway inflation, the next Great Depression, and a host of other calamities.
These folks are born pessimists. No amount of positive things can shake them from thinking things are about to go to hell in a handbasket soon.
And you know what?
We listen to them!
Humans are hardwired to pay close attention to potential dangers.
A hundred thousand years ago, it’s how we survived. Constantly worrying that a tiger or bear could be around the corner was a valuable instinct.
These days, we don’t have much to fear from bears or tigers.
However, our instincts make us pay close attention to potential dangers… both real and imagined. So, our subconscious minds compel us to click on bearish headlines, fixate on disasters, worry about elections, buy magazines with gloomy forecasts on their covers, and fret over 15% stock market corrections.
Or as media insiders like to say, “Fear sells” and, “If it bleeds, it leads.”
I encourage you to let common sense and the facts shape your actions instead of leaving it up to caveman thinking.
You’ll be far more successful investor if you do.
Why do I say that? And what are the facts?
Well, just consider that the stock market has averaged a positive annual return of 10% for the past 100 years. This is because the trend of increasing prosperity that is powered by free markets and free enterprise is one of the strongest trends in human history.
And here’s another important fact…
During the 20th century, stocks appreciated in value by 1,500,000%.
A 1,500,000% return turns every $100 invested into $1.5 million.
Wasn’t the 20th century filled with wars and recessions and other awful things?
There were two huge world wars, which killed tens of millions of people and devastated large portions of the world.
You also had the Great Depression… the Korean War… the Cuban Missile Crisis… the Watergate scandal … the inflation of the 1970s… the Arab oil embargo… the Vietnam War… and the savings and loan crisis of the 1990s.
You also had more than a dozen recessions and five horrible bear markets.
Despite all these horrible things, U.S. stocks appreciated in value by 1,500,000% during the 20th century.
Despite something bad happening every decade, incredible wealth was created by innovative businesses like Coca-Cola, Ford Motor, Apple, Hershey, Intel, Disney, General Electric, McDonald’s, Proctor & Gamble, Wrigley, Tootsie Roll, Pfizer, Microsoft, Walmart, Starbucks, and thousands of others.
We all know there are problems in America… like debt, poverty, and inequality.
These topics are covered daily in the news. They are the subjects of best-selling books. They have many people paralyzed by fear.
But if you know your history and know how powerful American innovation is, you know this is no cause to sell your stocks and crawl into a hole.
You know that for every ONE problem in America, there are THOUSANDS of brilliant people working on innovative solutions. They are developing amazing products and services that will make our lives better.
These are the types of people who invented the light bulb… the television… the pacemaker… the airplane… and the iPhone.
They are people who have the brains and worth ethic to create incredible businesses like Starbucks, Facebook, Amazon, Whole Foods, Apple, Nike, and Google.
These companies have provided good jobs to millions of people… they provided goods and services to thankful customers… and they produced hundreds of billions of dollars in wealth for their shareholders. All by creating and innovating.
Even better, these kinds of folks work in America. Despite what some Debbie Downers like to say, the legendary investor Warren Buffett is right: America is still the greatest place in the world to do business.
We have deep and liquid capital markets.
We have rule of law.
We have excellent accounting standards, which creates transparency.
We encourage and foster innovation.
We respect property rights.
We have an excellent transportation network (if you’ve fallen for the myth that U.S. infrastructure is terrible, I urge you to visit a third world country for comparison).
We have a huge population of well-to-do consumers ready to buy great products and services.
The advances made by American entrepreneurs allow today’s average American to live better than a king did 100 years ago.
Even people in America’s “low income” bracket have better medical care, better food, better transportation, and better access to information than anyone did in 1919, no matter what their level of wealth.
In other words, free markets, innovation, and productive enterprise has allowed mankind to achieve incredible progress despite wars, recessions, and bear markets.
It’s been that way for centuries… and it will continue to be that way in the future.
Below is a chart of the Dow Jones Industrial Index from post-World War II through 2021
The stock market declines of 1987, 2000, and 2008 – while painful at the time – are just speed bumps on the long-term chart. And the takeaway is clear: Over time, American prosperity rises and the stock market goes up.
With this picture in mind, my advice is to “make the trend your friend” and ignore the naysayers. Don’t panic over a market correction and don’t let the fear-stoking headline of the hour scare you out of your holdings of high-quality innovative companies that are poised to change the world.
During stock market corrections, I ask you to focus on what really matters: progress, transformational industry trends, creating value for others, and innovation.
Remember that despite all the negative occurrences of the past 100 years, shareholders of innovative companies that serve their customers have made fortunes.
It’s been the surest way to get rich in America for more than 100 years. It will be that way for at least 100 more. That’s why staying bullish on human progress and innovation is at the foundation of what we do at InvestorPlace.
It’s also why, when our subscribers write in to ask if we have “bear market survival” plans, we send them this essay.
Our “bear market survival” plan consists of reviewing the facts above, thinking long-term, and looking to buy high-quality stocks at discount prices.
Our “bear market survival” plan does not consist of selling stocks in a panic.
I believe that when an investor can “deprogram” themselves from obsessing over “the market” and interest rates – and instead focus on the things above – the things that history has shown really matter – that investor ascends to a higher level of understanding when it comes to money and investing.
It’s one of the most important milestones on the journey to mastering money.
The Next Time You’re Tempted to Panic, Look at These Eight Charts
Since 1928, there have been 26 bear markets in the benchmark S&P 500 stock index. After each and every one of them, stocks went on to reach all time highs. The track record here is perfect.
Recent history has eight outstanding examples of why a smart “bear market strategy” consists of keeping the facts in mind, thinking long term, and not getting scared out of stocks.
We like to think these eight charts are an antidote to a harmful financial disease we call “Short-Term-itis.”
For example, during the famed 1987 “Black Monday” crash, the stock market dropped 33.5% in a single day. It caused a short-term global financial panic.
However, less than two years later, the stock market reached an all-time high.
Then you have the big stock market decline of 1990, which was created by worries over a U.S. recession and the Gulf War. Stocks fell 19.9% during this decline. However, stock recovered and hit a new all-time high less than a year later.
Then you have the big 1998 market decline. Stocks fell 19.3% over the span of a few months. Stocks quickly recovered and reached a new all-time high by early 1999.
Then you have the 2000-2002 bear market. This crash came after the dot.com reached its frenzied peak in March 2000. Although this was one of the worst market downturns in U.S. history, stocks went on to recover and reach new all-time highs in 2007.
Next you have the stock bear market that accompanied the Great Financial Crisis of 2008. Stocks fell an incredible 56% during the decline. However, stocks went on to recover and entered a historic bull market that lasted a decade. Fortunes were made during the recovery and the market reached a new all-time high in 2013.
In the midst of the decade-long recovery that followed the 2008 crash, the market saw a decline of about 19% in late 2011. Stocks recovered and reached a new all-time high by early 2012.
In 2018, the market suffered a gut-wrenching decline of 19%. But by the summer of the following year, stocks had recovered and reached another new all-time high.
Then there is the covid-19 related stock market drop and recovery of 2020. When the world realized covid-19 was a serious worldwide problem, the market fell 53% in less than two months. However, government stimulus helped the market recover and stocks reached a new all-time high by the end of the year.
You’ve just gone on a tour of the biggest financial disasters of the past 60 years.
You’ve reviewed the most famous, most horrible bear markets and stock crashes in history… like the Black Monday crash of 1987… the dot-com crash of 2000… and the Great Financial Crisis of 2008.
You’ve also seen the track record here is perfect. Each period of rough times was followed by all-time highs.
These recent recoveries highlight a very long trend…
Every major stock market correction, every crash, every bear market in American history has been followed by new all-time highs.
That’s why we state once again… FOR EMPHASIS…
During stock market corrections, focus on what really matters: progress, transformational industry trends, creating value for others, and innovation.
Remember that despite all the negative developments of the past 100 years, shareholders of innovative companies that serve their customers have made fortunes.
Remember that it pays to bet on America.
Remember that a wise “bear market survival” plan consists of reviewing the facts above, thinking long-term, and staying long stocks.
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