Financial advisors tell you to stay the course, and not sell investments when the market goes down, because they have studied stock market history, and they know that short term market drops have little to no effect on your long term investment returns.
When you invest in the stock market, you are investing so that your funds may grow to provide you with future income, not current income. If you need money today, you should have investments in cash, money market accounts and bonds to withdraw from.
Your stocks should be invested so that you can take profits after years with strong market returns, and leave them alone during times where the market is down.
In the next six pages, we’ll study two dramatic market declines, and the resulting market recovery, so you may better understand why these events will not affect you unless you sell at the bottom.
First, we’ll look at October 19th, 1987, known as Black Monday, when the stock market went down 23% in a single day. As the graph above shows (from red dot to red dot), a market drop like this looks scary when viewed in isolation.
Yet "bear" markets, defined as a period where the market goes down 20% or more, happen frequently; from 1900 - 2007, 31 times, or about 1 out of every 3 years. The average length of a bear market is 367 days.
Despite bear markets, investors who do not panic when things are down, and give the market a year or two to recover, achieve attractive long term returns, as we’ll see in the next few graphs.
