The one thing that will determine whether the market makes you wealthy or leaves you bleeding on the side of the road
I’ve been an investor in the stock market for 50 years. Here’s the one thing that will determine whether the market makes you wealthy or leaves you bleeding on the side of the road:
What you do when the market drops.
Market drops fall into three broad categories:
- Corrections, which are drops of ~10%
- Bear Markets, which are when the declines reach 20%
- Crashes, which are when the market drops 30% or more.
Now the fact that each of these events has a name should tell you something. That something is that they have happened before, and more than once.
In fact, we know about how often they occur:
- Corrections we can expect every 1-2 years
- Bear Markets about once every five years
- 30%+ crashes about every twelve years.
- 50%+ crashes are much rarer. There have been three in my investing career: 1974 (-50%), 2000-02 (-51%), 2008 (-58%). Before that you have to go back to the Depression in the 1930s.
What this tells us is that corrections, bears and crashes are all a perfectly normal part of the process.
But, boy howdy, you wouldn’t know based on the reaction every time they occur. Panic sweeps the market and the drum beat is Sell, Sell, Sell!
And that is precisely the wrong thing to do. As Jack Bogle once famously said:
“Don’t just do something, stand there.”
It is critical that you avoid the panic, and the place to start is by understanding these market drops are to be expected. They are the price we have to pay in order to enjoy the powerful long-term growth stocks can provide.
They are like Hurricanes in Florida: Intense, scary, potentially very dangerous. Especially if you run outside in a panic in the middle of one. But hunker down, wait it out, and the storm passes. The sun returns and birds again sing in the trees.
Make no mistake, market drops are scary. Especially for novice investors. But it is essential that you tie yourself to the mast and stay the course. The market always recovers and resumes its relentless rise.
If someday it doesn’t, things will have gone so far off the rails where you are invested will be the least of your concerns.
But this time is different!
You can count on hearing this every time the market drops. Consider Covid.
During the Covid crises, the market dropped ~33% and my blog comments and social media lit up.
“This time, JL, it surely is truly different. This time people are dying. This time the entire economies of countries are being shut down. This time your Simple Path to Wealth will no longer work.”
Well, as I said at the time, yes and no.
Yes in that we hadn’t had a pandemic in 100 years, and the fact it was killing people is especially tragic.
But no in that the market would react as it always does: Panic, dropping, recovery and on to new highs.
Well, how about this then:
I’ll sell before the market drops and then buy back in at the bottom.
Sounds great, but the problem is nobody can do this.
“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”
Jack Bogle
Me either.
You can’t predict when they happen, how deep they’ll go, or when they will recover. But you can learn to love them.
Learning to love Mr. Bear
If you are building your wealth by saving and investing a portion of your income on a regular basis, as The Simple Path to Wealth calls for, market drops are an absolute gift. If you stay the course and continue, you get to acquire more shares at bargain prices.
Think of the “lost decade” of 2000-2009. The market lost a average of ~.63% a year. A long dry spell.
But if you’d stayed the course you would have had ten years to pick up shares at bargain prices before the incredible bull run we’ve enjoyed since then.
So there you have it. The one thing that will determine whether the market makes you wealthy or leaves you bleeding on the side of the road:
What you do when the market drops.
If you panic and sell, the market will leave you bleeding at the side of the road. If you stay the course and keep investing, the market will make you wealthy.
***********************************************************************
Addendum 1: The new, updated edition of The Simple Path to Wealth is available for pre-order now and releases May 20, 2025. Get yours here!
Addendum 2: Does The Simple Path to Wealth Still Work?