The period following the financial/economic collapse of 2008 saw the stock market drop dramatically and eventually regain most lost ground, but not before wild swings in stock prices.
The volatility of the stock market during this period (and the dramatic drop in prices) chased a lot of investors out of stocks and into bonds, gold or a hole in their backyard.
At one point in 2009, the S&P 500 Index was in the 750's, after falling from a range of about twice that (1,500's) in 2007. The index ended a three-year roller-coaster ride by closing around 1,250 at the end of 2011.
Not a complete come back, but much better than the pits of the financial crisis.
Those folks who fled stocks at the bottom of the market either have not come back in or bought back in somewhere along the slow and gut-wrenching climb back. There's a good chance they paid more than what their stocks sold for when they got out of the market.
In other words, they sold low and bought high.
The most courageous investors stayed in the market through the crisis and the smart ones bought when everyone else was selling (buying low).
There is ample evidence that investors staying in the stock market through major and minor dips come out much better than investors who try to jump in and out of the market (market timing).
Of course, this assumes you are intelligent about holding on to individual stocks. Remember, the long-term stock investor is really buying a business. If circumstances change dramatically for the company, regardless of market conditions, it may be time to re-think owning it.
When the stock market (and/or the economy) tanks, most all stocks will feel the effects, some more than others. However, if you have invested in a good company, you should feel confident that when circumstances improve, your stock will regain any losses - maybe not all at once, but eventually.
Weak companies may survive a recession, but may struggle to be competitive when the recovery begins.
Investing in stocks is about investing in the future earnings and growth of a company. If you pick a solid company with strong financials and a firm position in its economic market, you are looking for that growth to come. If a poor stock market or economy, slows growth, that's not a time to become alarmed.
What should you look for in a strong company that has the best chance of weathering a down market and economy?
- Solid earnings growth - Great companies have a history of solid earnings growth for at least the previous five years (10 years is better). Make allowances for recessions and economic slow periods, but the company should at least match the earning growth of other companies in its economic sector.
- Solid financial statements - Great companies have solid financial statements that reflect an appropriate level of debt for the industrial sector; a strong supply of cash and strong free cash flow; diversified income sources that help protect against declines in one source and a history of growing revenue and income.
- Solid market presence - Great companies hold positions of strength in their industrial sector that make it difficult and expensive for competitors to capture market share and position.
As you approach retirement, you will also want to think about an exit strategy for part of your stock holdings, which means you need to start at least five years before retirement.
During this period, you will need to think about when to sell and daily price changes will become more important. However, until that time, daily price swings are not that important.
If you see a continual decline in one of your core holdings, take another look at the company to see if anything has changed that might cause you to re-think the value of holding this particular company.
You should do a reassessment of all your holdings at least once a year and, perhaps quarterly just to be safe.
