Stock Market Sell-Off: 3 Things History Says Investors Should Know

In the past 20 years, the S&P 500 index (SNPINDEX: ^GSPC) has generated a total return of 578%. So, for investors who initially put $10,000 to work, their current portfolio balance would be almost $68,000. This proves that the stock market can generate sizable wealth for those who are patient.

But it's never going to be a smooth and easy journey. This is playing out right now. Economic uncertainty stemming from the Trump administration's trade policies is creating market volatility. As of April 23, the S&P 500 is 13% off its peak from earlier this year.

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Times like these are a perfect opportunity for investors to gain some perspective and familiarize themselves with some realities about how the market and economy have always functioned. Here are three things you should know.

1. Volatility is normal

Wouldn't it be great if our portfolios increased in value at 1% per month like clockwork? While this steady climb would make things much simpler from a psychological perspective, it's just not how reality is. The market gives us a glimpse into the mood of every investor. Like now, there can be periods of pessimism. Other times, the market couldn't be more ecstatic.

If you view a chart of the S&P 500's performance over the past couple decades, you'll quickly notice that bear markets and corrections happen more frequently than you'd imagine. Since 1950, there have been 56 corrections, which is a drop of between 10% and 20%. Knowing this should help ease worries.

The volatility can be difficult to stomach, but drawdowns are common throughout history. Here's where it might be helpful to keep Warren Buffett's famous words in mind: "Be greedy when others are fearful."

There is always uncertainty

When coming up with a general assessment of the state of the economy today, I think the best way to describe it is to say that things are extremely uncertain. Consumer sentiment is at its second-lowest reading ever. If they're not lowering growth estimates, businesses are withdrawing guidance altogether. Analysts and economists won't be surprised if we enter a recession this year. No one knows how the tariff situation will play out.

To be clear, though, we're always operating with a minimum level of uncertainty. If there was zero uncertainty, everyone would be directing their capital to the riskiest assets without any hesitation.

Think about the past five years. We've experienced a global pandemic that brought the economy to a screeching halt. There were also supply chain issues, inflation, and aggressive interest rate hikes by the Federal Reserve. Despite what should've been headwinds, the S&P 500 generated a 104% total return since April 22, 2020.

Play the long game

The best way to achieve strong investment returns, especially when there's heightened volatility, is to buy low, sell high, and repeat. In theory, this makes the most sense, as it allows investors to avoid losses and maximize gains.

But, it's not possible to do this consistently and successfully. Timing the market like this seems like a smart move. But investors should understand that this is not the right way to build lasting wealth in the stock market.

It's all about investing money early and often. In other words, time in the market matters more than anything. Here's where dollar-cost averaging can work wonders. Buying on a monthly basis, for instance, forces you to regularly put money to work no matter what the market or economy are doing.

The market consistently rewards those who display patience, emotional control, and a long-term focus. There's no reason to believe this is ever going to change.

And so, by recognizing that volatility is normal, that the economy is always in a state of uncertainty, and that it pays to be fully invested, investors stack the odds in their favor.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.