MW Another stock market crash? Don't just do something - sit there.

By Gary Smith

Why this is no time for stock investors to panic

Take a deep breath and remember past panics.

Here we go again! The stock market is like a national casino where the daily wins and losses can be huge and are certainly unpredictable. Stock prices are collapsing and investors are panicking. A typical cry: "I need to get out of the market before I lose my life savings." This isn't the first time and certainly won't be the last time that fear has trounced greed.

Relatives, friends and pundits have been spooked by what has happened and terrified by what might happen next - which makes it a good time to take a deep breath and remember past panics. During the 2007-08 crash, the S&P 500 SPX fell 41% from its high. Panicked investors didn't consider that the U.S. benchmark index was still 2.5 times what it had been 20 years earlier, delivering an annual rate of return (including dividends) of 7% - far higher than the return on U.S. Treasury bills or Treasury bonds during this period. Instead, they fixated on the market drop and feared that more pain would come.

Retail investors weren't the only ones worrying. At the time, Zvi Bodie, a prominent economist and financial guru, suggested that retirees retreat from stocks. He wrote: "Prices dropped by 37% last year. While improbable, there's nothing to say they couldn't drop by that much again next year or the year before you retire. And diversification doesn't take away that risk. That's why retirement money belongs in truly safe assets whose value won't go down - not in stocks." In an interview with the MIT Sloan School of Management, Bodie advised, "Unless you have the heart of a high-stakes gambler, get out of stocks now."

Unfortunately Bodie offered this advice in March 2009, which happened to be the very bottom of the stock-market crash. As it turned out, this was a buying opportunity of a lifetime. U.S. stock prices are now almost seven times higher than they were when Bodie advised investors to get out.

A capricious casino in the short run; a benevolent casino in the long run.

While the stock market seems like a capricious casino in the short run, it is a benevolent casino in the long run. As a whole, companies make profits and distribute part of these profits to shareholders through dividends and share repurchases. As the economy grows over time, so do dividends, earnings and the value of companies.

In gambling casinos, bettors may make money in the short run but, on average, they lose money in the long run. In the stock market, shareholders may lose money in the short run but, on average, they make money in the long run. A precipitous drop in stock prices is not a reason for panic but a potential buying opportunity.

The U.S. stock market got clobbered again in 2022, with the S&P 500 down 20% in the first six months of the year - the worst half-year period in 50 years. Again, investors panicked. Again, I advised taking deep breaths. In a MarketWatch column in June 2022, I wrote: "Nobody knows where stock prices will be next week, next month, or at the end of the year. But a range of plausible, conservative assumptions about the future cash flow from stocks indicates that it is highly likely that the intrinsic value of the S&P 500 is currently above its market price. Stocks are cheap."

In retrospect, U.S. stocks were cheap in June 2022.

For long-term investors (which most of us should be), the bigger risk is to sit on the sidelines.

Now we have the 2025 crash, and again we need to try to calm down. Consider: The current stock yield (dividends plus repurchases) is around 4%, while long-term U.S. Treasury yields are around 4.6%, a difference of 0.6%. If dividends and repurchases grow by more than 0.6% a year, stocks can be expected to outperform bonds in the long run. If dividends plus repurchases grow by, say 3% to 5% a year along with the U.S. economy, the long-run return from the S&P 500 will be substantially higher than the long-run return from bonds.

Of course, it's hard to avoid being frightened by the short-term volatility of stock prices, but for long-term investors (which most of us should be), the bigger risk is to sit on the sidelines. Nobody knows what stock prices will be tomorrow, next week or next month, but the U.S. has a strong, resilient economy powered by creative, hardworking people. Ten, 20, 30 years from now, the U.S. economy will be much larger than it is today - and stock prices will be much higher.

More: The stock market is in trouble, but you're calm. What's your secret?

Also read: We're awash in 'expert' investment advice. How do you find what's right for you?

-Gary Smith

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April 08, 2025 16:26 ET (20:26 GMT)

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