We’d all love for the market to go on a tear forever, reaching record highs and blowing minds; but the truth is, downturns are a reality, particularly if you are a long-term investor.
The fact that downturns are inevitable can be scary. And off-putting, to be quite honest. Add to this that we have no idea when the next downturn is coming or how long it will last. Anyone who says they can predict a market downturn is…um…overconfident. (That said we do build downturns into our forecasts...more on this below.)
That’s why when the market throws you for a loop — as with most unnerving situations — you’re better off by not panicking and sticking to an actual plan instead. One that doesn’t consist of selling everything immediately in an attempt to cut your losses. Because if history has taught us anything, it’s that staying the course may be the best way to make it through a downturn.
And it’s easier to do than you may think.
Downturns? Say It Ain’t So
Over the past almost 90 years, the stock market has trended upward, having returned around 9.5% on average annually. But it’s had its share of downturns along the way as well: The market posted a loss in 24 of those years.
The upshot here? Downturns happen — and the market keeps on keeping on. Also: Not all market downturns are the same. You have “dips,” which we’ve seen with semi-regularity in the fall (though they can happen other times in the year too); crashes, which is when the market falls by 10% or more in one day; and bear markets, which are long-term periods of falling prices.
Ok, so what happens when you find yourself caught in a serious downturn? How long has it taken to recover from a tough market? While it depends on the downturn, how you react may also affect your recovery.
A Better Strategy
Below is a chart of the stock market decline of 2007 and 2008. Pretty horrific markets with pretty frightening headlines, you’ll recall. (Believe me, I remember very well.) But, according to Morningstar’s “The Importance of Staying Invested,” if you invested $100,000 into the stock market at the beginning of 2007 and didn’t touch it (no investing more money and no selling), you would have $195,000 at the beginning of 2017. So, despite staying in the market through one of the worst downturns in history, you still ended up making money.
But if you sold everything when the market hit bottom (in January of 2009) and stayed on the sidelines in cash, you would have ended that same 10-year period with just about $55,000. The kicker: That’s more than $140,000 less than what you would have had if you just left it alone.
So, selling — which certainly felt like a relief at the time — turned out to be a losing strategy.
But that’s not all.
You could have recovered even faster had you continued to invest through the downturn of 2007 and 2008. Research shows that if you invested $1,000 in the S&P 500 at the beginning of 2008 and another $1,000 at the beginning of 2009, you were back in positive territory at the end of 2009. (That’s why we’re so pleased that more than two-thirds of Ellevest’s clients have set up recurring auto deposits; it’s a smart way to invest. Go you!)
Helping You Out
When a downturn hits, you don't have to go it alone. Here's what we do at Ellevest to help you navigate the inevitable equity market downturns:
At Ellevest, your investment portfolio is globally diversified and not just invested in stock-based ETFs. Diversification helps lower your portfolio’s overall risk, so you’ll take on even less risk than the equity-only scenarios mentioned above.
The composition of our portfolios range anywhere from a low equity allocation for shorter-term goals like a home goal, with a six-year time horizon, to a high — up to 97% —for a longer-term goal like retirement (depending on your timeline). That’s because the increased risk associated with equities may give you the opportunity for increased returns over your goal timeline. And the thinking is that with a longer timeline, you may have more time to recover in the event of a downturn...so you can likely afford a greater level of risk.
Your investment portfolio is automatically rebalanced whenever the asset allocation, or mix of investments, gets off-kilter. So if a downturn throws off your portfolio’s asset allocation, we’ll rebalance it to make sure that you’re never concentrated in one type of investment.
In building your investment forecast, Ellevest assumes down markets have a 1% probability of happening; some other forecasts can put that likelihood around 0.13%. We've decided to include more downmarket scenarios — at a frequency that we’ve seen historically — to give you more realistic forecasts (than some others you may find elsewhere) of what your investments may be worth.
We target getting you to your financial goals — or better — in 70% of markets. No, that’s not 100%; in that case, you would be saving, which isn’t investing and doesn’t give you the opportunity to earn market-like returns. But we build in some “cushion” between what we would expect to happen on average and what we are working to deliver to you.
Last but certainly not least: You can set up auto deposits with Ellevest. (This a good kind of “setting and forgetting.”) This can serve to take the emotion out of investing, which can make it less likely that you panic. On top of that, you’re investing regularly, which might be one of the best gifts an investor can give to herself.
Downturns aren’t pretty, and it’s likely that you’ll encounter some over your investing life. But remember: History has shown us that downturns come with an expiration date, and the market has tended to rebound. That's why staying invested in the market — as hard as that can be — is often viewed as a winning strategy. It just takes some time.
Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.