It has been a while since we have experienced a traditional recession and bear market. The COVID recession of February 2020 was a different kind. It was short (two months), and the bear market (one month) was very quick. Before COVID, you have to go all the way back to the housing crisis of December 2007 to find a more traditional recession. That one lasted 18 months and stocks fell 34%, peak to trough.
I do not know if we are in for an economic downturn now, but recessions and recoveries are a natural part of the economic cycle, and we need to understand them. There have been 13 recessions since 1945, lasting on average 11 months each. The recoveries following the recessions — and this is important — have lasted almost six times as long as the recessions — 58 months versus 11 months.
The most important number to keep in mind in all this is 10.5%, the average annual increase in stocks since 1957, when the S&P 500 came into being. So even after factoring in the damage from all bear markets, stocks have had a very positive return over time.
This does not mean you throw caution to the wind, mortgage the house, and invest everything in stocks. Far from it. If you are in retirement or even close to it, you need to keep a healthy amount in safe and secure investments: a year or more of expenses, or whatever lets you sleep well at night. Better safe than sorry.
With your longer-term investments, make sure to keep a good balance between real estate, stocks, and bonds. I realize that bonds have lost money recently, but I am confident they will provide a cushion in the future, as they have in the past, against the volatility of stocks. As for the stock market, the key is time. The longer you have the better you will do. Bank of America recently computed that between 1929 and 2021, your chance of a one-day loss in the market was 46%, not much different from a coin flip. Over one year your chance of a decline was 26%, meaning you made money on average, three out of every four years. Over 10 years your chance of loss was only 6%, and over a 20-year time span there was never a negative return.
So, our advice today is, make sure you have a healthy short-term reserve, diversify your holdings, and then with your stock investments remember three principles – stick to your guns (no market timing), do not get greedy, and be patient as hell!