If I Could Tell Every New Investor 1 Thing About Building Wealth in the Stock Market, It's This

When many people think of building wealth, they think of investing during a bull market. That’s because the progress during these times is very obvious. You may see the S&P 500 steadily marching to new highs, with many companies delivering double- or even triple-digit gains in a matter of weeks or months. For example, right now, you might look to the S&P 500’s 78% increase over the past three years, or the 500% gain of biotech Moderna and the 200% increase of tech giant Micron Technology since the start of this year.

Bull markets are great because they bear the fruit of our efforts: The stocks we researched and then bought a while back may deliver fantastic returns during these periods. And, of course, during a bull market, when you spot a good investing opportunity, you should go for it. But if I could tell every new investor one thing about building wealth in the stock market, it wouldn’t necessarily have to do with bull markets. Instead, it would be the following…

Bull market momentum

It’s clear that new investors may be more tempted to get started in the middle of a bull market than when investing times are tough. During the euphoric moments, it seems as if everyone is winning, and a stock that has positive momentum may keep on climbing, offering you a fast gain. This is encouraging when we’re first getting our feet wet in the market.

Now, here’s what I would tell every new investor about building wealth in the stock market: Don’t stop investing during tough market times. In fact, when the market declines — whether it’s a simple dip during a bull market, a shift to a bear market, or a market crash — prepare to take a close look at quality stocks that have fallen and consider scooping them up.

Why do I say this? During tough market times, you can gain access to top-quality stocks that may fly high — to the point of being out of reach — during better market times. This offers you the opportunity to get in on market stars for a fraction of the price you would have paid during better market times. In investing, it’s key to focus on valuation and pick up stocks when they are trading at reasonable levels. Of course, if you buy when markets are down, rewards might not be immediate as they often are when the market is soaring, but that’s OK.

Even during a bull market, you can optimize the performance of your portfolio if you buy and hold rather than locking in a quick gain over a period of days or weeks. If you sell quickly, you might miss out on an even bigger long-term increase.

What happens over time

The chart below shows the 10-year performance of the S&P 500 and a few high-quality stocks across industries, and as you can see, they’ve each advanced in the triple- or quadruple digits.

^SPX data by YCharts

And the S&P 500 over time has delivered an average annual return of 10%, showing the buy-and-hold strategy works.

Of course, the key to this is choosing quality stocks with clear long-term prospects. For example, a player like Apple has a solid brand moat with products — such as the iPhone and Mac — that users come back to even if rival products are cheaper. If Apple falls during a market downturn, the company’s earnings strength and competitive advantage offer shareholders reason to be optimistic that the stock will recover and go on to climb.

All of this means that one of the keys to building wealth in the stock market is to keep investing throughout market cycles. It’s important to remain present regardless of the environment so that you won’t miss out on opportunities — they can be found at any time, and they may be particularly numerous when the market is declining.