Here's the No. 1 Reason to Buy Stocks During a Sell-Off
Earlier this year, the S&P 500 roared to a record, confirming that a bull market had indeed arrived. From there, the index went on to reach new records over and over again, and investors piled into growth stocks. But the start of the second half of the year hasn't been so bright. The benchmark posted its worst July in a decade and tumbled further earlier this week as part of a global market sell-off.
The S&P 500, the Dow Jones Industrial Average and the Nasdaq joined indexes around the world in this movement on Aug. 5. And some of the stocks that have led this year's gains -- such as Super Micro Computer, Nvidia, and Amazon -- started to lead the losses. What caused such a movement? Investors' concern mounted on the lack of interest rate cuts so far and a disappointing jobs report last week -- and in times of economic weakness, growth players could suffer the most.
It's too early to say if this sell-off will be brief or longer lasting, but in either case, there is a case for going against the flow and buying stocks during a sell-off. In fact, here's the No. 1 reason why you should consider buying stocks during such a tumultuous time...
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The importance of long-term investing
First, before talking about this reason, it's important to remember that your best shot at growing wealth over time is to invest for the long term. This means holding onto a stock for at least five to 10 years and accompanying this player along its development path. You may experience some downs, but if you choose companies with solid businesses that can withstand various market environments, you'll also get your share of ups -- and over time, you could score a major win.
All of this means that you can hold on through a sell-off without worrying much. And it also means that you don't have to worry about timing the market -- or attempting to get in on a stock at the very lowest price. If a stock you buy today falls further in the coming weeks, it generally won't result in much of a change in your returns over the long run. The most important thing is choosing stocks when they're trading at reasonable valuations.
And that brings me to the point I'd like to make today. The No. 1 reason why you should consider buying stocks during a market sell-off is that you'll find many terrific companies trading from reasonable to even bargain levels. This is what's happening right now in the wake of the Aug. 5 sell-off.
As I mentioned earlier, investors sold shares of technology companies since these sorts of growth stocks are most vulnerable during times of economic trouble. But, since we're investing for the long term, short-term fluctuations shouldn't hurt our returns -- as long as we choose the right companies. By this, I mean market leaders, those with strong earnings track records, and companies with solid future prospects.
Today's bargain stocks
A good example of this is Amazon (NASDAQ: AMZN). The company is a leader in e-commerce and cloud computing, has started generating billions of dollars in revenue from the high-growth area of artificial intelligence (AI), and brings in billions of dollars in earnings each quarter. Today, the stock is trading for 34x forward earnings estimates, down from more than 40x a few weeks ago.
Another example is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), which lost more than 6% in two trading sessions, leaving it trading for 20x forward earnings estimates, down from more than 24x in July. Alphabet's Google is the world's leading search engine by far, helping the company to bring in billions of dollars in advertising revenue. On top of this, Alphabet, like Amazon, benefits by selling AI products and services to customers of its cloud computing business.
All of this means that, yes, it's painful to see your portfolio lose value (at least on paper) during a sell-off, but don't let this stop you from investing. As long as you have paid your bills and necessary expenses and have extra cash to use as you'd like, now is a great time to put that money to work -- and it should go a long way considering all of the bargain stocks out there right now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Nvidia. The Motley Fool has a disclosure policy.
