The first several weeks of 2016 have not been kind to investors, with some commenters worrying that we may be in for a massive stock market crash.
The good news for people who are investing for the long term, like savers who are relatively early in their careers and aren’t likely to retire for decades, is that if history is any guide it doesn’t really matter whether or not stocks crash in the near term or even suffer a terrible decade-long bear market.
We’ve noted in the past that timing the market is a difficult, if not impossible, task for the ordinary investor, and that keeping a steady hand and not panicking is a better strategy.
In the darkest days of the financial crisis in October 2008, Warren Buffett observed in a New York Times op-ed that stocks tend to go up in the long run.
Nobel laureate economist Robert Shiller maintains a collection of monthly historical price data for the S&P 500 and related older stock indices going back to 1871.
To see the effects of holding stocks for the long run, we looked at what an investor’s price return would have been if they bought the equivalent of an S&P composite index fund in each month and then held it for 10, 20, 30, or 40 years after that month:
Holding stocks for a long time has historically tended to lead to solid returns, even when up against horrible timing: A share of a hypothetical index fund bought in September 1929 — right before the stock market crash that set off the Great Depression — would have still tripled in value by 1969.
Granted, that 200% return from buying at the pre-Great Depression peak is less impressive than the nearly 3,000% return our hypothetical investor could have received buying near the lows of the mid-1970s bear market and selling at 2015’s highs, but it still shows that, no matter what happens in the interim, stocks have historically tended to go up over the long run.
Nearly 80% of months since 1871 had positive S&P composite price returns over the following 10 years. Holding stocks for 40 years resulted in positive gains for all but 10 starting months in the last 145 years:
Holding stocks for a longer time also has tended to result in higher average returns over the long run:
It is, of course, important to note that history is no guarantee of the future: It’s entirely possible that we are on the verge of not just a stock market crash, but of an unprecedented generations-long bear market.
However, such a thing hasn’t happened in the US in the last century and a half, and so something would truly have to be different this time in our markets and economy.
So, if the future does indeed continue to look like the past, then whatever happens in the next weeks, months, or years shouldn’t have too much of an effect on what a 20- or 30-something’s retirement account will look like decades from now when they actually retire.
Such an investor is probably best off avoiding panic.
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