With consumer confidence plunging to a 17-month low in December, many fear a recession is imminent. And with the S&P 500 notching a new all-time high this month, some think that markets have nowhere to go but down as their economic fears become reality.
Maybe, although as the legendary investor Warren Buffett has said, it's futile to try to predict the market's next move. Still, what if the bears are right and a meltdown is right around the corner?
Image source: Getty Images.
As an experiment, I ran the numbers on what would happen if a hypothetical investor put $10,000 into five market tops over the last 60 years. This investor, who we'll call Joe, makes five investments in index funds that track the S&P 500. But he makes them at the worst possible times, buying right before stocks plunge or plateau for years.
So, how does the world's worst market timer do?
Market top No. 1: December 1965
Coincidentally, one of the worst times in history to buy stocks was exactly 60 years ago. From December 1965 to October 1981, the S&P 500 returned just 1.7% a year. While there wasn't a market crash in 1965, markets were severely overvalued, as Buffett pointed out in a 1999 presentation. In it, he pointed to the Dow Jones Industrial Average, which stayed almost exactly flat in the 17 years after December 1965, posting a gain of less than 1%.
SNPINDEX: ^GSPC
Key Data Points
In this instance, Joe's $10,000 in 1965 became $13,600 in 1981. You probably don't need me to tell you that this 31% gain over almost 16 years doesn't keep pace with inflation.
Unfortunately, the next time he dips his toes in the water, he invests right before an actual crash.
Market top No. 2: October 1987
Being the world's worst market timer, Joe invests another $10,000 right before the infamous "Black Monday" crash of Oct. 19, 1987, in which the S&P 500 falls 30% in a single trading session. In a few hours, Joe's $10,000 becomes $7,000. Bet he wished he could do that one over!
Market top No. 3: March 2000
The dot-com collapse, which began in early 2000, is typically associated with the tech-heavy Nasdaq, but the S&P 500 also suffered significant losses. After reaching a peak in March 2000, it lost almost half its value over the next 18 months. Joe's initial $10,000 investment in March 2000 became $5,000 by September 2002, and he wouldn't recover until 2007.
Market top No. 4: October 2007
The 2008-2009 financial crisis kicked off in September 2008, but the S&P 500 hit its peak almost a year earlier. Not until early 2013 did the index fully recover from the disaster.
Joe's $10,000 investment, made in October 2007, fell more than 50% within two years, becoming less than $5,000 as the S&P 500 fell from 1,549 in October 2007 to a low of 666 in March 2009. And while the S&P 500 began clawing back its losses after the March 2009 bottom, it took until March 2013 to reach its October 2007 levels, making Joe's $10,000 investment essentially dead money for almost six years.
Market top No. 5: February 2020
We all remember the COVID-19 pandemic and how it hurt the stock market in early 2020. The S&P 500 hit a record high on Feb. 19, but catastrophe was around the corner. Surprisingly, the S&P 500 quickly recovered from the 26% plunge it saw from February to March. Still, Joe no doubt wished he had bought at the dip rather than a relative top.
So, how did Joe do?
As you've seen, each of Joe's five $10,000 investments was initially disastrous. However, assuming our fictional investor held through the disaster all the way to today, he would have made out quite well.
- From the December 1965 investment, made at the S&P 500's top of 93, his $10,000 became $757,120.
- From the Black Monday investment, made when the index stood at 328, his $10,000 became $308,150.
- From his March 2000 investment when the index stood at 1,552, his $10,000 became $50,120.
- From his October 2007 investment when the S&P 500 hit 1,576, his $10,000 became $44,760.
- And his investment Feb. 19, 2020 investment, made when the S&P 500 closed at 3,386, turned his $10,000 into $20,450.
All told, the $50,000 invested in his five misadventures turned into $1.18 million. The hypothetical shows that the expression "time in the markets beats timing the markets" rings true.
There are many grim headlines in the news these days, and some are extremely serious. However, there have always been threats plaguing humanity, including during Joe's lifetime, such as the stagflation of the 1970s, the threat of nuclear conflict during the Cold War, 9/11, the Great Recession, and a once-in-a-century pandemic. There will be crises to come in the next 60 years as well. But the math shows that patient and level-headed investors can overcome them all.
