Grace* was in her early 40s with a small mortgage, strong savings, and a steady emergency pot. She had built up enough capital to start investing and wanted her money to start working hard for her. However, at the time of starting her investment journey, there were a lot of recessionary fears in the market. As a new investor Grace was looking for reassurance. We investigated the likelihood of a recession and how her investment might fare during a downturn.
Timing is difficult to get right, and market timing is even harder. Even with a lot of research and huge amounts of information, unexpected black swan events can still happen in financial markets. During periods of heightened stock market volatility, it’s human nature to be concerned but if experience tells us anything, it’s that investing really is all about time in the market, not timing the market.
The global stock market has increased its value by seven to ten per cent every year, even during years of financial turmoil, including 2008. The United States National Bureau of Economic Research has charted recessions in the global economy. There have been six in total since 1970, including the Covid-19-induced recession of 2020, and they show a familiar pattern.
The data tells us that investing during a recession does not mean lower returns over the long term. Even if Grace is starting her investment journey during a volatile period, the data suggests that she will see good returns in the long run. The decisive factor for investor returns is the longevity of their investments, not the time at which it was first made.
The data from the US National Bureau of Economic Research shows us that even if you begin investing at the beginning of a recession, you will still see a return of 22% in five years. If Grace were to keep her money in a deposit account, and leave it vulnerable to inflation, it would decline in value by 10%-15%.
Source: US National Bureau of Economic Research
The chart above shows four investments in the US equity markets at different starting points around the time of a recession, but with the same five-year and ten-year end dates. As you can see, while the investment six months before the recession declines at the recession point, the return in five years is significant. Fast forward ten years later and the returns are stronger again.
Looking at the entry point of twelve months after the start of the recession, the ten-year return is an extremely impressive: 178%. A return such as this might encourage investors to make an investment at precisely the point when the market is lowest, but this point can only ever be known in hindsight. To obtain the best possible return, Grace decided to spread her market entry points.
Good returns can still be made even during times of uncertainty. On only five occasions since 1930 has the S&P500 declined more than 15% in the first six months of a calendar year, during the second half of the year in those periods the median performance was +15%.
After reviewing the data available Grace was assured that time, not timing was on her side when came to investment. Most of Grace’s capital remained in defensive stocks (companies that make consumer essentials) to maintain a small amount of growth. As Grace grew in confidence, she looked for stocks that were most likely to rebound strongly post-recession. She stayed informed on markets during the downturn and diversified all her assets throughout so that none of them became high risk.
*Names have been changed to protect client anonymity.