If I Could Tell Every New Investor Just 1 Thing About the Stock Market Right Now, It's This

You can’t explain to someone who doesn’t have a child what it is like to have a child. You have to experience it for yourself to understand the joy (and frustration) of being a parent. The same is true of a bear market; until you live through a prolonged and deep downturn, you just can’t understand the emotions you will live through. I know those emotions because I lived through the dot-com crash and the Great Recession. If I could tell every new investor just one thing right now, it would be “this too shall pass.”

What goes up… comes back down

The reason I’d go with “this too shall pass” is that it applies to both bull and bear markets. Right now, the market is near all-time highs despite a host of very real risks, including geopolitical conflicts, inflation, and elevated debt levels. I didn’t make that list up; Jamie Dimon, the CEO of JPMorgan Chase (JPM -0.82%), highlighted them during his discussion of the company’s second-quarter earnings. Basically, I’m not going out on a limb when I suggest that investors should be worried that the current bull market is likely to end sooner rather than later.

And when the next bear market arrives, it could be pretty brutal. Why? Because the S&P 500 index (^GSPC -0.30%) is at valuation levels that it last visited ahead of the dot-com bubble bursting. If history is any guide, you should be prepared for as much as a 50% drop in the S&P 500 and likely even more for the tech-heavy Nasdaq.

SPY data by YCharts

But even then, there’s a silver lining. Because, like all bull markets, bear markets eventually end, too. And history shows that the market not only recovers from bear markets, but goes on to reach even higher highs. This is why buying and holding, even if you just own an S&P 500 index fund like Vanguard S&P 500 ETF (VOO -0.32%), can be such a powerful investment plan.

Think long-term and be prepared for short-term swings

The real goal is to have a plan and stick to it, understanding that the market will go both up and down over time, sometimes in dramatic and emotionally challenging ways. If you understand that the market swings from bull to bear, and back again, you can create an investment plan that will allow you to stick it out through the swings. For me, that’s dividend investing with a value bias. For others, it is as simple as just buying the S&P 500. Whatever you do, however, remember that this too shall pass because no market in history has gone up or down forever.