Help, the sky is falling...
During a period of decline in the market, many individuals feel like they are losing their shirts (and possibly much more).
Remember, corrections happen often.
Technically, so do recessions.
How often do these things happen?
According to USnews, corrections happen at least once every 2 years. Sometimes they happen annually. They typically only last a couple of months and drop less than 20%.
Bear markets and recessions occur every 4-5 years. They typically drop at least 20% and last for about a year.
The worst meltdowns or recessions in recent memory was "The Great Recession". That sucker lasted 18 months and was the worst meltdown since World War II. During that period, the S&P 500 lost approximately 50% of it's total value.
Now that's scary stuff!
How long does it take to recover?
The biggest factor of a recovery is if you actually stayed invested throughout the downturn.
You see, if you choose to try and time the market and you get out while it's on the way down, you technically have to time it correctly twice. Once on the way down, and then once on the way back up when you "re-enter" the market. Market timing is a fool's errand.
There are professional money managers who spend their whole entire life's work trying to time the market and, guess what... 92% of actively managed funds fail to match the returns of the market (i.e. S&P 500 index) over a 15 year period.
That means if they cannot do it, why would you even try? You don't have the time to sit around and read financials all day like these guys do.
As for how long the typical recovery takes.
In a correction, you'll be back to square within a couple months.
Recessions take a bit longer but you usually get your shirt within 18 months, sometimes shorter, sometimes longer.
The point being is that they always come back. Always.
Sometimes it took a little longer (think Great Depression). And sometimes you were back so quickly you didn't even realize it happened.
What's a guy (or gal) to do?!
Or better yet, invest.
In what? Low cost index funds. Come on, you knew that was coming.
If you are an index fund investor, selling is the worst idea during a downturn. If you are in single stocks, and not in index funds like any smart person would be, then you might actually want to consider jumping ship and selling. My advice for the future would be stop trying to stock pick because you're no good at it.
It was the infamous Warren Buffet who said when the sky is raining gold do not go outside with anything less than a washtub. This is the very basis of the saying "buy low".
When you invest in index funds like the S&P 500, you are betting on the entire US economy. Realistically, in order to lose ALL of your money, the entire country would have to "go out of business". I wouldn't bet on that happening. Even if it did, who cares how much money you have in your investment accounts! Maybe you better start working on that underground bunker you've been yapping about with your buddies.
If you are invested in broad based, low-cost index funds, then I would plan to stay the course and avoid selling in a downturn. The only time that you could ever lose money is when you sell or the entire U.S. economy goes bankrupt. If you stay invested in a broad based index fund you won't have to worry about any single company going out of business because you are investing in hundreds of them at a time. They would all have to lose their shirts for you to lose everything.
If you had a crystal ball and could see things coming, perhaps you could adjust your asset allocation (i.e. more bonds and less stocks) prior to or immediately after the beginning of a downturn.
Take the onset of the coronavirus (COVID-19) for example. If you were someone who first heard of the potential outbreak on the news somewhere around January or February of 2020, you could have adjusted your asset allocation since bonds tend to hold there value better than stocks (conversely, bonds also tend to have lower returns than stocks over the long-term).
Then, once the "meltdown was in full effect", shift back from heavy bond holdings back into equities and enjoy the recovery as the market rebounds back to it's previous high.
In the end, no results are guaranteed. Past history does not indicate future returns.
Besides, I have no idea what the hell I am talking about and this sure as hell isn't investment advice. You have to take the good with the bad. Those reported 10% returns on equities in the stock market include the horrific 50% downturns like we experienced in 2008. Like I said, you take the good with the bad.
Remember, corrections happen all the time. Further, we are never that far away from a full recession. They are coming. They will continue to come. Be prepared. Be ready to see your accounts lose massive value. This are the harsh realities. If you cannot handle it, maybe you should go bury that money under the shed and let the worms get it.
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.