Over the past few years, the stock market has remained remarkably resilient. Despite several periods of short-term volatility, the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) have all reached new all-time highs in recent months.
However, record stock market highs can create a hidden risk. When the next bear market arrives—and it will eventually—investors who buy at peak prices could see their portfolios fall soon afterward.
In 2009, a “Double Down” signal flashed for the little-known chipmaker Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia.
Investing near record highs can feel intimidating, and some investors may be tempted to avoid the market and wait for a pullback. But how damaging would it really be to invest at the “worst” possible moment? History suggests the outcome may not be as bad as many investors fear—with one important caveat.
The worst recessions have one trait in common
Even the most severe recessions, market crashes, and bear markets are temporary. Although they can cause significant short-term financial and economic damage, long-term investors have historically been rewarded for staying invested.
For example, imagine investing in an S&P 500 ETF in October 2007, the month the Great Recession officially began. The downturn was the most severe economic contraction in the post-World War II era, and the stock market took years to fully recover.
The most important point for investors is that a decline in value is not the same as a permanent loss of money. An S&P 500 ETF would have lost 55% of its value during the Great Recession. But an investor who stayed invested until the market recovered would not have locked in those losses.
From October 2007 to today, the S&P 500 has generated total returns of more than 600%. If you had invested $10,000 in an S&P 500 ETF at that time and made no additional contributions, you would have more than $70,000 today.
The same pattern has appeared repeatedly throughout market history. The dot-com bubble officially burst in March 2000, creating a bear market that was arguably even more challenging for many investors. It was one of the longest bear markets in S&P 500 history, and the Great Recession struck shortly after the market began reaching new highs again.
Even so, an investor who bought an S&P 500 ETF in March 2000—immediately before two consecutive recessions—would have earned total returns of around 722% by today.
What history teaches long-term investors
If there is one key lesson for investors, it is that the timing of an investment matters less when the investment horizon is long enough.
Could an investor theoretically have earned more by waiting for the bottom of a bear market before buying? Certainly. But hindsight is 20/20, and it is impossible to know in real time where the market is heading.
Instead of waiting for the perfect buying opportunity, investors may benefit more from investing consistently and remaining in the market for the long term. Even if you invest at the “wrong” time, history indicates that the market can more than compensate for that timing over time.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Source: finance.yahoo.com
