Why down Markets can be Good News for Mutual Fund Investors

Bear markets are ugly. When the bears have their way, markets tumble, panic takes over, and investors force fund managers to sell the good with the bad to raise enough cash to meet the stampede out of the market.

Historically, the smartest investors have made great fortunes after the blood in the streets has stopped flowing. They lick their wounds, build cash reserves and wait for the market to turn. Only fools try to time the market. The Warren Buffets of the world know better. They focus on value over the long haul. They only invest in solid companies with growth potential. Buffet once said that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Down markets can be good news for mutual fund investors who are willing to wait out the storm. Serious bear markets leave the landscape littered with bargains. When the dust settles, many of the wonderful companies that attract savvy investors will be available at wonderful, bargain basement prices.

Make no mistake, when the market turns, the best of the fund managers will be in position to cash in on a sustained up market when it comes, and it will. They’ll be busy consolidating their remaining positions in strong stocks and scouring the market for the true bargains.


And catch the rising tide when the market regains it’s health, before the herd moves in. Vanguard Group founder, John Bogle, invented the Index Fund in 1975. His Vanguard 500 Index Fund is based on a strategy that mirrors the performance of the S&P 500 index and does it well, with extremely low operating costs. This fund has returned 12.15% annualized since it’s creation in 1976, and has outperformed 90% of all domestic equity funds over the last 3 and 5 year periods.


Index fund investing is a good, conservative strategy that pays off, especially over the long term, and it’s the best place to put most of your investment dollars, particularly at the start of a market recovery. If you’re willing to shoulder a bit more risk with some of your portfolio (say 5 to 10% max), focus on important but undervalued sectors of the economy. This can be a recipe for long term gains.

A good way to do this is with sector funds. Look for sectors that might be temporarily out of favor and invest in a good fund that mirrors that sector. You might also look for long term growth opportunities in immature industries. Or you could “hedge” against inflation with a portion of your portfolio invested in commodities.

Down markets can be good news for mutual fund investors who do their homework. Smart investors will be in position to catch the elevator as the market rises. Not on the ground floor because nobody can predict a sustained market up turn, but the savvy investor will be ready to climb on board on a lower floor and ride the elevator to the next top.