It’s undeniable that we have seen a lot of discussions lately about the current state of the economy, talking about this upcoming “looming” recession and what to do when the stock market drops in price.
One of the most common questions I hear is “Should I be investing my money now… Even though there’s a recession coming within the next year or so”
So let’s look at how much it actually matters if you invest before, during or after a recession, and how to come out profitable regardless of what happens to the market.
Statistically and according to research, when is the best time to invest? And what has happened before and after EVERY single stock market correction in history.
First of all. Let’s get this out of the way. I think it’s really important that none of us fear a recession or think that the stock market dropping in price is necessarily a bad thing. Instead, we should embrace it when it does happen!
There’s a popular saying that “Riches are made in recessions” and I have to say that could not be truer. Anytime the market drops in price that just becomes an unbelievable opportunity to buy stocks at great discounts.
From this perspective, we should absolutely view a price drop as an opportunity and not as this gut-wrenching feeling that your investments are losing value, and that will be a very tough reality that many will have to face. Especially if you’re someone who’s only been investing for the last 5–7 years. All you’ve experienced is the market continually hitting all-time highs, and consistently giving 5–20% returns each and every year. But this is not normal to happen consistently and there will be years when you’ll end up losing money and have to plan accordingly to come out ahead.
Here’s the thing… When the stock market does drop in value, the best thing you could possibly do is absolutely NOTHING. That’s right, it’s to do nothing. Studies have shown that market timing rarely ever works consistently and it’s nearly impossible to predict when exactly when the market is going to drop in value and when it’s going to sky-rocket back up.
Sure some people might get lucky with timing the market here and there, but being able to do this longterm accurately and consistently is pretty much not going to happen. This is not just my opinion, this has been studied very thoroughly. For example, the investing firm Charles Schwab analyzed the investing data between 5 different groups of investors between 1993 and 2012 and this is what they found.
- The first type of investor invested $2,000 at the absolute LOWEST price point of each and every year.
- The second investor just invested $2,000 at the very beginning of each year.
- The third type, invested an equal amount each an every month throughout each year.
- The fourth investor invested $2,000 at the absolute highest price and worst timing each and every year.
- The fifth investor didn’t do anything at all and just kept the money in cash just waiting for a market crash.
Obviously the best investor type, was the one that made perfect timing each and every year. But the surprising results here is that the second and third types of investors who just invested $2,000 consistently every year at a set interval came in just ~$5–7500 less than the investor who had literally perfect timing each and every year down to the exact day for 20 years straight.
Even the fourth investor who had the worst possible timing who put in their money each and every year at the absolute market peak had a total investment return of $72,487 (still not bad!)
And in the last place, the investor who was hoarding cash waiting for a market crash came in much worse at only $51k
I think this is pretty clear. Even if you somehow managed to have perfect market timing down to the exact hour over 20 years you are only going to come out ahead an extra ~6.8% opposed to the person who didn’t spend time worrying about timing and just invested no matter the current situation.
Again the chances of you being able to time the market to perfection every single year over 20 years… statistically, it’s just not going to happen.
If you’re still not quite convinced by this Charles Schwab analyzed 68 rolling 20-year time periods dating all the way back to 1926 and they found that in 58 out of the 68 time periods that were analyzed the ranking was exactly the same.
In short. It’s more important to invest consistently and not sell than it is to try to time the market perfectly. Speaking of people who think that they can time the market, I really caution you and recommend you to rethink this mentality.
Brad Barber and Terrance Odean analyzed 66,000 households between the years of 1991 and 1996 and they found that the investors who traded most often earned an annual return of 11.4%. Which sounds pretty good by the way, until you consider that the stock market returned an average of 17.9% in that same period.
The reason for the lack of performance is pretty clear. People are just bad at timing the market and they missed some of the best buying opportunities by either selling too soon or buying in too late and secondly, the investors buying and selling stocks in a short time period are often taxed at a much higher rate and have to pay more fees than the long-term investors and this is something that absolutely needs to be taken into consideration!
And if that hasn’t yet convinced you against market timing. Maybe this will. If you look at the DOWS WORST 20 day performances, you’ll notice that the majority of the best single-day point increases tend to occur within roughly two weeks of its worst single-day declines.
This means if you happen to sell as the investment price declines you could very well also miss out on some of the most profitable trading days out there.
And of course, here’s the data to support that statement:
If you just stayed invested for the last 15 years in the S&P500 and didn’t do a single thing, you would have had a +7.77% annual return. But if you sell just a little bit too early and happen to miss just the 10 most profitable trading days your return drops to an abysmal +2.96% and if you happen to miss the 30 best trading days because you were trying to “time the market”. Your return suddenly becomes a loss…
So with all of this data in mind, here’s how you can beat the stock market in late 2020 or any other year regardless of what happens to the market.
DON’T TRY TO TIME THE MARKET AND DON’T SELL WHEN THINGS DROP IN PRICE.
Instead, the ONLY method which is HISTORICALLY PROVEN TO ACTUALLY WORK OVER THE LAST 100 YEARS — is just to invest as soon as you have the money, hold that investment over 20 years or longer, and do absolutely nothing when it goes down in value. That’s it. That’s how simple investing really is.
“It’s not about timing the market, it’s about time in the market”
— Warren Buffet
There is ALWAYS going to be “something” that could impact stock market returns, but whether or not we see a negative yield that year is nearly unpredictable. This continues throughout the last 100 years…so us in 2019 is nothing new, the context might be different but the results will very much be in line with history.
This is the strategy we use to achieve a +34% annual average return at https://weeklystocktip.com. The only difference is that we strategically choose which stocks to invest in to maximize reward and minimize risk with a +90% win rate.
If at this point you still think you know when the market is about to crash, here’s how I hedge against market crashes in my personal portfolio.
Articles like these, require a significant amount of research, so if you wouldn’t mind destroying that clap button. That would be greatly appreciated!
Research:
PDFs:
Time, not timing is the best way to capitalize on stock market gains
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