Most investors today have become accustomed to the idea that stock prices just keep going up. Even when there have been corrections over the past few years, they’ve been retraced pretty quickly on the way to new highs.
Not much time is being spent worrying about the downside of investing in stocks.
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Warren Buffett has spent the last several decades explaining why pullbacks aren’t necessarily a bad thing. In fact, investors might even actually want one every once in a while.
In his 1997 letter to Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) shareholders, Buffett indicated that long-term investors should hope for multiple opportunities to buy stocks on sale. Only those nearing the withdrawal stage should really be rooting for a rally. Buffett said, “Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
His suggestion is very simple. When stock prices fall, keep buying at discount prices. Don’t give in to the temptation to sell.
Lower prices can create better long-term opportunities
If you’re someone investing, say, $700 a month into the Vanguard S&P 500 ETF (NYSEMKT: VOO), any dip in the share price gives you the opportunity to accumulate more shares. More shares mean bigger growth opportunities over time.
With VOO trading right around $700 right now, every purchase would buy you one share.
But if the S&P 500 (SNPINDEX: ^GSPC) falls by 10%, that same $700 buys 1.11 shares. For long-term investors, those additional shares can experience the same market gains as the shares you bought at higher prices. You just have more of them.
That’s essentially the Buffett argument. The accumulation phase of your investing life should be about buying as many shares as possible. Corrections and bear markets provide better opportunities to pick up more shares.
Since the S&P 500 has historically recovered from every drawdown to establish new all-time highs, those shares bought at lower prices can actually help improve your returns over time compared to if you were just consistently buying at highs.
Market declines shouldn’t be viewed only as losses on your existing investments. They should be viewed as opportunities to capture better prices on future investments.
