TLDR:
Diversify investments and maintain a long-term view to weather recessions, as historically the S&P 500 has returned an average of 6.4% one year after a recession, a jump to 12.1% after three years, and 10.4% after five years, with an average of 12% and 11.5% over 10 or 20 years respectively, but past performance is not a guarantee of future success.
Ladies and gentlemen, gather ’round as we venture into the thrilling world of recessions and the stock market. You may think you’ve seen this show before, but with every new act comes a twist that leaves you gripping the edge of your seat. And as any good financial sage will tell you, the key to surviving these nail-biting episodes is diversification and maintaining a long-term view.
Recessions are kind of like a bad cold – you can’t always predict when they’ll hit, but they’re guaranteed to make an appearance every now and then. Despite their pesky nature, these economic downturns are a part of life, and knowing how to weather the storm can mean the difference between a minor inconvenience and an all-out disaster.
Now, let’s get down to the numbers. According to some number-crunching by Dimensional Fund Advisors, the S&P 500 has historically performed reasonably well over 10 or 20-year periods after economic downturns. And while there’s no crystal ball that tells us exactly how the market will fare in the future, these averages can provide some comfort to investors with a penchant for panic.
For example, one year after a recession starts, the S&P 500 has historically returned a cozy 6.4%. Fast forward three years, and that figure jumps to 12.1%. Five years later? A respectable 10.4%. And if you can hang in there for 10 or 20 years, returns have averaged 12% and 11.5% respectively. Who knew riding out a recession could be so financially fruitful?
But before you break out the champagne, let’s not forget about those pesky caveats. These rosy averages can hide some pretty ugly variations. For instance, the best 20-year return after a recession started in February 1980 was a whopping 17.2% annualized, while the worst, starting in May 1960, clocked in at a measly 7.3%. So while you might be tempted to roll the dice, keep in mind that past performance is not a guarantee of future success.
This roller coaster of returns becomes even more apparent over shorter periods. After the recession of 1953, the S&P 500 skyrocketed by nearly 32% in a year. But in 1973, 1981, and 2007, the market still languished in negative territory one year after the recession’s start. The lesson here? Be prepared for a wild ride, and buckle up accordingly.
So, what’s an investor to do in these uncertain times? First, don’t put all your eggs in one basket. Diversify your investments by spreading your wealth across stocks, bonds, and cash in varied locations. Keep a safety net in the form of government money market funds, federally insured savings accounts, and the like.
And most importantly, don’t try to time the market or rely on the so-called experts to tell you when to buy or sell. In the end, it’s about staying the course and keeping a long-term perspective. Will there be ups and downs? Certainly. But as history has shown, those who stick with it can emerge from the recession gauntlet better off than before.
In conclusion, as we teeter on the edge of another potential recession, let’s remember that no one knows what the future holds with absolute certainty. So, take a deep breath, diversify your investments, and maintain a steadfast long-term view. And if all else fails, remember that sometimes the best strategy is simply to hang on and enjoy the ride.
