Concerned about your investments in today's economic climate? Here’s what history teaches us.
As you've been watching the stock market, you may be wondering when your 401(k) and other investment accounts will start to show steady gains again instead of scattered losses. The optimist might answer that it'll recover within a few months; the pessimist might say it'll be years or even never. The true answer is that none of us, not even the investment experts, knows for sure.
That's because the future is uncertain, and no one can predict it with complete accuracy . Rather than trying to predict the future, what you can do is to compare the present with historical patterns and try to make the best decisions you can while considering a range of possible outcomes.
Stock Market Crashes: What History Has Taught US
The "stock market" is actually comprised of multiple markets in which investors buy and sell shares in publicly traded companies. These markets include the New York Stock Exchange (NYSE) and NASDAQ Share prices can rise and fall as investors make decisions based on their expectations for the company's business outlook and future profits. Share prices can also be impacted by broader economic trends and events, such as elections, global conflict, and yes, pandemics.
The historical record shows that stock markets are cyclical, with repeated patterns of expansions and corrections over long periods of time. While these ups and downs occur with a certain regularity, each downturn differs in its depth and duration.
The U.S. stock market has crashed 11 times since the late 1920s.
One of the most severe crashes started in September 1929, one month after the start of the Great Depression. This downturn in the stock market lasted 34 months. One market index, the S&P 500, dropped 86 percent. This index didn't return to its previous high until 1954.
The most recent stock market crash began almost 13 years ago in October 2007, when a housing bubble popped and financial markets were destabilized, triggering the Great Recession. This downturn lasted 17 months. An earlier downturn, triggered by a bubble in Internet stocks and exuberant speculation in the stock market, started in March 2000 and lasted 30 months.
Other downturns were much shorter. A crash that began in December 1961 ended after just six months. A 1987 downturn that began on Black Monday, one of the worst single-day collapses in stock market history, was over in just three months.
The important point about all of these crashes isn't how severe they were or how long they lasted, but rather that, given time, they all ended. In every case, stock prices eventually rose to new heights, rewarding investors who owned shares or funds during these recoveries.
The Perils of Market Timing
The stock market's crash-and-recovery cycles naturally create a temptation for investors to try to "time" the market, buying at the bottom and selling at the top. If the future was predictable, this strategy would make sense. But since no one knows for certain when the market will reach the top or hit the bottom, this approach is too risky for most people to use as an investment strategy. The odds are stacked against market timers because they have to buy and sell at the optimum time.
If you're feeling anxious about your investments, you're not alone. A recent J.D. Power survey found two-thirds of U.S. adults were worried that COVID-19 would hurt their financial situation. Among the top three concerns was the declining value of stock portfolios.
When markets get crazy, it’s easy to get caught up in the noise, make sure you understand investing basics and assess your risk tolerance, because even though it's impossible to predict when the stock market will recover, historical patterns suggest that, given enough time, it will.