Is It Smart to Buy Stocks After the S&P 500 Falls Into a Correction? History Offers a Clear Answer.

Yahoo

30-03-2025

The last month has been tough for stock investors. The benchmark S&P 500 (SNPINDEX: ^GSPC) index fell four weeks straight starting in mid-February, pushing it briefly into correction territory. While stocks have recovered somewhat from the fall, the factors driving that rapid decline in prices may still leave some lingering uncertainty for investors.
Investing during a correction is tough. Once stocks start going down in price, it feels like momentum will take over and keep pushing shares lower. Bounces like the one we've seen recently could prove fleeting as markets remain uncertain about the future. That seems especially relevant in the current market, given how fast the sell-off occurred and that it was triggered by confusing trade policies that seem to change day to day.
But buying stocks when the S&P 500 enters a correction has historically turned out to be a great opportunity for investors. Despite the risk of stocks declining further, bringing on a bear market, the odds are definitely on the side of the buyers.
Since World War II, there have been a total of 48 corrections of at least 10% in the S&P 500. That works out to about one every 20 months. Those 48 corrections only fell into bear market territory (down at least 20%) 12 times, according to data from Carson Investment Research. From a historical standpoint, the odds are good that the current correction won't continue falling to that point.
So, the downside risk from here looks rather muted. But what's more interesting is that buying right when stocks pass the threshold to be marked a correction has historically led to some very strong results over the next few months.
Since 2008, the S&P 500 fell into correction territory 15 times, according to Dow Jones Market Data. In all but two of those cases, stocks were higher a year later. In fact, 60% had recovered within three months. That makes seizing the opportunity when stocks fall very important.
The median one-year return of the S&P 500 after it enters a correction since 2008 has been 18.1%. In comparison, the S&P 500 has averaged a return of 9.4% per year over the same period.
So, investing while stocks are down is usually a winning formula to outperform.
While the average returns after a correction are very strong, it's important that you don't try to time the market and wait for the correction to come before putting your cash to work in stocks. As famous investor Peter Lynch said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
The S&P 500 can go a long time between corrections. The average is 20 months, but they can often come in quick succession in volatile markets. That means investors could end up waiting years for a pullback in stocks -- years when the only thing stocks do is go up in value.
The lost opportunity of sitting on the sidelines is far greater than the gain you could make from timing an investment perfectly at the bottom of the market. So, while you shouldn't be afraid of investing going into a correction, you also shouldn't be afraid to invest as stocks move higher.
That's important because stocks have already recovered significantly. The S&P 500 trades just under 7% off its all-time high as of this writing after a solid bounce back. You shouldn't wait for prices to fall back down again. They might never again reach the lows we saw a few weeks ago.
A key strategy for many investors is to maintain a watchlist of companies you find compelling, but whose stocks don't present the value needed to invest in them right now. When the market falls into a correction, those stocks could end up falling to a price where it makes sense to buy them. Don't wait. When the stock price meets your valuation, it's worth buying.
Growth stocks will often fall further than value stocks in a correction, which could create a great opportunity to buy some of the best-performing stocks that have seemed too pricey recently. Indeed, the most recent correction saw big-tech growth stocks, particularly semiconductor companies, fall significantly amid fears about potential tariffs against Taiwan (home of the largest chip manufacturer in the world). But long-term investors may have a good opportunity to buy some of those stocks right now.
For those who don't have the time for or interest in researching individual companies and stocks, there's nothing wrong with buying a broad-based index fund. The Vanguard S&P 500 ETF (NYSEMKT: VOO) is popular for a reason. It's simple, it keeps expenses low, and it can perform well above average compared to more active strategies.
However you choose to invest, you should see a correction in the S&P 500 as an opportunity to buy more of your favorite stocks and ETFs. Sitting on the sidelines out of fear has been a bad strategy throughout history, and particularly over the last 17 years.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Is It Smart to Buy Stocks After the S&P 500 Falls Into a Correction? History Offers a Clear Answer. was originally published by The Motley Fool