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Investing in the equity market is one of the most optimal ways to compound money due to the high expected returns over the long-term. Historically, stocks have provided more robust returns than alternative investments, such as bonds and savings accounts. Furthermore, compounding allows returns on investment to grow at an exponential rate as earnings are reinvested. The Snowballing Effect Albert Einstein once famously proclaimed, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." Compounding in the stock market is powerful because it allows investors like you to grow their investments at a higher and higher rate over time. It occurs because returns from dividends and capital gains can be reinvested - allowing you, the investor, to achieve even higher returns. As time elapses, this can mean your investments snowball exponentially as you begin to earn additional returns on your initial returns. Corrections of this Magnitude Don't Come Around Often The last time the U.S. stock market had this large of a correction in terms of length of time correcting, and magnitude of the correction, was back in 2008. While most investors look at bear markets as scary situations, savvy investors are doing their research and working on finding the next true market leaders. For example, from late 2008 to late 2009, Bank of America shares rose from a low of $2.53 to more than $18 a share. Casino operator Las Vegas Sands saw a meteoric rise from $1.30 in early 2009 to more than $50 a share by the end of 2010! Every handful of years the market gives the gift of a correction. Bank of America and Las Vegas Sands are just two examples of many winners following nasty bear markets. Whether it was the Covid Collapse of 2020, the Global Financial Crisis of 2008, or the Dot Com Bust of 2000, the result for investors who survived was massive gains in the following years. The time is now to take advantage of such a correction. To savvy investors, crisis equals opportunity. If you were to pull up a long-term chart of the S&P 500 Index, you would be delighted to find that market corrections like the one we are in now, only come around so often and have led to new highs in the coming years every single time. So, stop getting yourself down, and get excited. More . . . | ||||
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| The Rubber Band Phenomenon Wall Street refers to bear markets as a decline of 20% or more from highs for the major market indices such as the S&P 500 Index. Though corrections of this nature can be unsettling, they provide the most significant opportunities for those investors who managed risk properly on the way down or are newly entering the market. Because stock prices have declined, opportunistic investors can buy shares at a lower price. Investors can equate a bear market to a rubber band being stretched and then snapping back. So long as the rubber band does not break, the more you stretch it in one direction, the harder and faster it will snap back in the opposing direction when you release the pressure. If you look at the history of the U.S. stock market, the proverbial "rubber band" has never snapped. To go back to a time when it almost snapped, you would have to go back to the Great Depression in 1929, Black Monday in 1987, or the Global Financial Crisis of 2008. With that, it goes without saying, that if you invested when the news was the worst, when earnings were down or when sentiment was poor, you would have done quite well on the way back up. How Do You Know When the Time is Right? The short answer is that you don't. Unfortunately, no one rings a bell at the exact bottom, and occasionally when you try to pick bottoms, all you end up with initially is stinky fingers. Nevertheless, the best course of action for an investor is to do the best you can with the imperfect information you have at your disposal. Even though the information investors have is never complete, the good news is that if you are wise about how you enter the market, your timing does not need to be perfect to be successful. You also do not need to enter the market all at once, but rather can methodically pyramid into the market and add more positions as your current ones show a profit. Remember, there is no reward without risk, but there is immense opportunity cost to not taking any risk. Take, for example, a new cuisine. If you are at a restaurant trying a new dish you have never had, two possible outcomes exist: you will hate the dish and have wasted a small amount of time and money or you will have discovered a new taste that can last a lifetime. Now think of your options from a financial perspective. You can put all your cash in a bank account and know that it's safe, but earn basically zero interest. Or, on the contrary, you can take a portion of your assets that you are comfortable with risking and invest and compound it over time. Remember, the best time to plant a tree is twenty years ago. The second-best time is now. In time, a small walnut can grow into a giant oak. Time in the Market Beats Timing the Market If history is any precedent, the glass-half-full view of the U.S. stock market wins in the long run. Since 1970, investors have experienced stagflation and an energy crisis, a 20% crash in a day, a boom and bust of Internet stocks, an unprecedented housing crisis, a global pandemic, and a bunch of geopolitical events in between. Despite the whirlwind of adverse events that occurred, the S&P 500 Index delivered a compound annual rate of return of +11.3% during that period. In other words, imagine you bought $1,000 worth of the S&P 500 in 1970 and reinvested dividends. Accounting for the appreciation in the S&P 500, your initial investment would have ballooned to $25,000 by 2022! Keep in mind, the S&P is just the baseline. Many informed investors achieve gains in excess of the market. Where Do We Stand Today? Perspective is everything on Wall Street. Did you know that U.S. markets just suffered their worst year since 2008? The Nasdaq fell 33.1%, the S&P 500 dropped 19.4% and Dow Jones surrendered 8.8%. Meanwhile, many tech stocks fell upwards of 60%, 70%, or even 80%. Does this mean the market has officially bottomed? Of course not, but history tells us that we are likely closer to the end of the bear market than most think. Innovators Keep Innovating The returns could be game-changing if you pay attention now and conduct research on the next true market leaders. Remember, just because the stock market is down, does not mean that America's best and brightest stop innovating and creating the next big winners. In fact, some of the most successful stocks in recent years, such as Tesla Motors, were made public during a down cycle. As sure as the sun rises tomorrow, America's top entrepreneurs will continue to think of new and unique products and services. Eventually, the best ideas will be molded into public companies with growing earnings. Investors like you and me who use a data-backed and quantitative approach will be able to take advantage of these opportunities when the next bull run inevitably comes around. Like a weed breaching its way through a crack in asphalt, U.S. markets will rise again. The question is: will you be there when opportunity knocks? How to Start Taking Advantage of Today's Market Opportunities It's simple. Gain access to all our real-time recommendations for the next 30 days as part of our see-everything Zacks Ultimate program. Do you have a preferred form of investment? If so, you'll find its expert recommendations among our trading and investing services. This is your chance to explore our Buffett-style value stocks. Insider trades (the legal kind) that CEOs and other high-ranking officials are stockpiling. Simple-yet-powerful options plays. Income investments. And even the latest tech breakthroughs. But maybe you're not sure which types of investments are best for you. No problem. The Zacks Ultimate experience can help you find out rather quickly and easily. Last year alone, our private recommendation services gave investors the opportunity to close 176 positions with double and triple-digit profits. Gains reached as high as +284.2%, +348.7%, and even a remarkable +1,007.1%.¹ Bonus Report: You are also invited to download our Ultimate Four Special Report which highlights our best 4 stocks to buy in Q1. Each has strong fundamentals and exceptional growth potential, and each is ideally suited to soar in current trading conditions. The opportunity to download Ultimate Four ends this Sunday, February 5. See our Zacks Ultimate and Ultimate Four picks now » Thanks and good trading,
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through January 2, 2023. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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