You’ve probably heard that passive, long term investing yields better returns over time, but it can be challenging to trust that advice during down times. Plus, there’s always advice online about what to invest in right now, and what trend to jump on before it’s too late.
The truth is, long term investing does work, even during a recession. And those knee-jerk investments in response to the markets can do more harm than good.
Here’s what the numbers have to say about investing during a recession:
Historical performance and long term investors
The data we have from the past 16 recessions in the United States shows that investors had better returns if they stuck with stocks. According to Dimensional, 75 percent of the time, stock returns were positive two years after the onset of a recession.
On average, the market return two years after a recession began was 8.8 percent.
This graph from Dimensional shows how $10,000 would have hypothetically fared after a recession:
This graph shows that while some years led to decreased returns, most years led to an increase in returns.
But what about the post-recession stock returns that didn’t bounce back within two years? It can happen, though it’s not as common. In those cases, long term investing still shows better returns, particularly if you have a well-balanced portfolio.
Long term investors: A portfolio built for turbulence
In investing, the only thing we truly know for certain is that everything will change. What goes up will come down, and vice versa. The most successful portfolios are built on that knowledge, instead of chasing trends.
Stocks are in your portfolio to capitalize on the upswings, and take a more aggressive approach to earning money. But they will come down, which is why you include bonds to cushion the blow. Too many stocks leaves you open to a lot of risk, but too many bonds means you might not be maximizing your portfolio’s earning potential.
Additionally, the longer you invest, the lower your risk of losing money becomes. This graph from Schroder’s shows that as your time in the markets increase, odds of losing money drops significantly:
Ultimately, the numbers have proven again and again that long term investing pays off. So the next time we face a recession, take comfort in knowing that as long as you’ve set up a balanced portfolio, the odds of bouncing back are very much in your favor.
Here are some additional posts about investing during a recession:
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