The S&P 500 is up by more than 150% since the 2020 market crash.
Warren Buffett calls bear markets an investor's best friend.
Adding to your investments consistently and regularly is a reliable strategy for generating strong long-term gains.
Heading into 2025, it looked like this was going to be another year of strong gains for the market, but that has changed since President Donald Trump first announced heavy tariffs on major U.S. trading partners, and then made his "Liberation Day" announcements that imposed further taxes on imports from almost everywhere. Although it has been making a slow and steady recovery from its recent lows, the S&P 500(SNPINDEX: ^GSPC) is still down more than 4% year to date, and more than 8% from its peak.
Investors may be concerned about investing now for a whole bunch of reasons, like tying up their money in a dropping market or the near-term potential for stock gains when tariffs could seriously eat into corporate earnings.
There's no way to know how long this period of volatility will last. But as with the market having just exited its third month of declines in a row, history offers a clear answer to the question of whether to invest right now.
Image Source: Getty Images.
This is part of the market cycle
Financial data company Morningstar compiled data on the market's movements during the past 150 years and found that there have been 19 market crashes during that period. These crashes varied widely in length and severity, with the longest being the Great Depression, when the market lost 79% of its value in a downturn that lasted for seven years. By contrast, in early 2020, the market dropped by 20%, but the slump only lasted for a few months.
The commonality among all of those market plunges is what happened next: The market eventually rebounded and soared to new heights.
The time it takes for a recovery period to end -- as signaled by the market reaching a new high -- can be much longer than the time it takes for the crash phase itself to end. After the Great Depression, the market experienced several attempts at breaking through the previous high, only to fall back again rapidly. There were three "mini crashes" across a period that lasted until well after the end of World War II, when robust industrial activity led to the great economic boom of the 1950s, which means the market was in and out of bear markets for more than 20 years.
In the 2020 crash, it only took seven months to reach previous highs, and since the bottom of the 2020 crash, the S&P 500 has gained more than 150%.
A market dive can induce fear and even panic among investors as they watch the value of their portfolios plummet, but corrections and bear markets can be the best time to buy stocks. Warren Buffett is a big proponent of buying when the market is down. Perhaps his most-quoted line on the subject is that he tries "to be fearful when others are greedy and to be greedy only when others are fearful," but there are other gems from his many decades of quips that are equally pointed.
For example, in 2008, when the market was in shambles, he provided a dose of optimism in his letter to Berkshire Hathaway shareholders' letter by reminding them that "When investing, pessimism is your friend, euphoria the enemy." In a New York Times opinion piece the same year, he wrote: "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price."
The magic formula
Beyond that, though, there's a magic formula that helps turn investors into millionaires: investing consistently through bull and bear markets. If you put even $100 into a diversified basket of stocks every month, leave it alone to grow and compound over many years, and reinvest your dividends, you should be able to build a solid nest egg.
Here's just one example. If you start your portfolio with an initial investment of $10,000 and add $100 to it every month for 30 years, you'll invest a total of $46,000 of your own hard-earned money. But assuming that the market returns an average of 10% annually -- which is about what the S&P 500 has returned over the past 20 years -- at the end of those three decades, your portfolio will be worth nearly $372,000.
Image source: Investor.gov.
Always invest carefully
A caveat to this thesis is that if you're going to need the money fairly soon for any reason, investing with a focus on the long term may not be the best method. If you're retired, for example, and relying on the sales of assets and the passive income from your investments to cover your expenses, you should definitely be cautious about how you invest today. A long-term investing style is recommended for the average investor, but there are reasons people might need to curtail their investing or adjust their risk levels during corrections or bear markets. This is why many investors start shifting money into defensive (i.e., "safe") stocks when the market is under pressure.
If you have a long time horizon, you can build wealth by taking advantage of market downturns to buy shares at cheaper valuations, which on average will give them more upside potential when the recovery comes.
There's no way to know how long this downturn will last, and it's not a wise move to attempt to time the market. It's already been several months, but if the past 150 years of history on the U.S. stock market are any indicator, at some point, the market will reach new highs again, and go on to reward those who invest steadily along the way.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
