Since March 2009, Wall Street has experienced its longest bull market in history. And this record-breaking streak might have you wondering whether or not it's coming to an end soon.
It might even cause you some worry and hesitation about putting a lump sum into the market just before it plummets. But even if this happens, if you're invested for the long term, you can still come out on top.
|Crash||Year(s)||Percentage Loss||Percentage Gain Since||Value Today|
Losing 30% to 40% of your money over a short period can be scary. But those losses should be temporary. Stock market crashes don't go on forever, and in the past, they've always been followed by an even longer period of gains.
During the dot-com crash, you would've suffered three years of back-to-back losses, but that would've been followed by five years of gains. In 2008, you would've experienced a year of negative returns followed by 13 years of positive earnings. The period of time that you will have losses versus gains can't be determined exactly, but historically the gains have far outnumbered the losses. And since 1929, there have only been five significant stock market crashes.
Timing the market versus time in the market
As tempting as it might be to try to sell your investments so you avoid these losses, this attempt at timing the market could make you miss out on crucial recovery days. And the more days you miss, the lower your rate of return and final dollar amount could be. The table below shows how $10,000 invested on Jan. 2, 2000, would've grown by Dec. 31, 2020, if fully invested, versus missing some of the best days of the recovery.
|Average Annual Rate of Return (Decline)||Ending Value|
|Missed best 10 days||3.35%||$19,347|
|Missed best 20 days||0.69%||$11,474|
|Missed best 30 days||(1.49%)||$7,400|
|Missed best 40 days||(3.44%)||$4,969|
|Missed best 50 days||(5.21%)||$3,430|
|Missed best 60 days||(6.81%)||$2,441|
During this period of time, there were about 5,000 trading days, and missing only 60 of the best ones could've cost you about $40,000! In the same way that you have no clue when a stock market crash will happen, you also don't know when a recovery will occur. That's why, as hard as it could be to stay invested through the bad times, it's in your best interest to do so.
Risk versus return
Your asset allocation model is your mix of stocks, bonds, and cash. But it's also the driving force behind your investment returns. The more aggressive your investment portfolio, the higher your average rate of return. You'll also see greater returns in years when the stock market is doing well but worse returns when it's doing badly.
For example, in 2008, a portfolio 100% invested in stocks would've lost 37%, a portfolio 100% invested in U.S. investment-grade bonds would've gained 5.24%, and a portfolio evenly split between stocks and bonds would've lost 15.88%. The next year, when the stock market recovered, you would've gained 26.5% if you had 100% large-cap stocks, 5.93% if you had 100% U.S. investment-grade bonds, and 16.2% if you had 50% in each.
If you're having a hard time staying invested, it could be because you're invested too aggressively. You may feel fine when the stock market is gaining because you are earning more money, but more scared when it crashes because you are losing more. And because timing the market is so hard, you probably shouldn't have different asset-allocation models -- you should choose one that you feel comfortable with during all market scenarios.
Stock market crashes are not fun, but they are inevitable. And avoiding them altogether is probably an unrealistic goal. Instead, learning ways to navigate through them mentally and emotionally can prepare you for long-term success.