This Is the 1 Move Every Long-Term Investor Should Make Right Now, According to History

By now, you've probably heard that investors who remain invested throughout down markets typically achieve higher long-term returns than investors who sell. However, history also highlights another crucial move long-term investors should make -- starting now.

If you haven't already done so, now is the time to begin building a short-term market downturn fund that gives you the wherewithal to use when such an event inevitably occurs without selling your depressed assets.

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Shaky markets

The wrong time to make withdrawals is when the market is turbulent, and your investment portfolio is taking a beating. That's because you'll have to sell a greater number of assets to net the money you intend to withdraw. However, if you have a separate fund to draw on, you can avoid losses from selling.

Building a short-term market downturn fund involves setting money aside in an interest-bearing account, like a high-interest savings account, money market fund, or certificate of deposit (CD). Your goal is to save enough to cover one to three years' worth of investment account withdrawals. For example, if you normally withdraw $1,000 per month, aim to put away $12,000 to $36,000.

Why it works

The power of investing lies in your assets generating their own returns on top of past returns, otherwise known as compounding. However, compounding only works if you stay invested, hang tough through market downturns, and allow your investment to recover and keep growing.

Let's say stock prices fall by 20% or more amid a bear market. Some investors will naturally sell and run; others will continue to withdraw from their accounts as though nothing has changed; and still others will stay the course by leaving assets in their accounts and withdrawing from a separate fund instead. Ideally, you'll be in the group of investors with a separate fund you can count on.

History reveals a surprising twist: Roughly 42% of the S&P 500 index's strongest days during the past two decades have occurred during a bear market, before it became clear that a bull market had once again kicked in. And once that bull market starts, staying invested lets you capture any gains that result from the market upswing.

A combination that historically works

Building up enough cash to draw on during market downturns while also continuing to invest in your accounts can be a powerful combination. Here's why: All the assets sold as investors flee the market in the early days of a downturn are available for sale, and at a bargain price. That provides you with the perfect opportunity to fatten your portfolio by picking up high-quality assets and paying less.

If your goal is to make the most of the next market downturn, a cash fund may help you weather the slump while also expanding and diversifying your portfolio.

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