Since March 2009, Wall Street has experienced its longest bull market in its history. And that record-breaking streak might make you wonder if it’s coming to an end anytime soon.

It might even cause you to worry and hesitate about putting a lump sum on the market just before it crashes. But even if that happens, if you’re invested for the long term, you can still come out on top.

Stock symbol all in red indicating falling prices.

Image source: Getty Images.

Here’s what would have happened if you had invested $ 10,000 at the start of the year before the last three stock market crashes.

crash Years) Percentage loss Percentage of gain since Value today
Dot com 2000-2002 38% 214% $ 31,440
Great recession 2008 37% 218% $ 31,814
Coronavirus 2020 34% 34% $ 13,460

Data source: Yahoo! Finances, author’s calculations.

Losing 30-40% of your money in a short period of time can be scary. But these losses are expected to be temporary. Stock market crashes don’t last forever, and in the past they have always been followed by an even longer period of gains.

During the dot-com crash, you would have suffered three consecutive years of losses, but that would have been followed by five years of gains. In 2008, you would have experienced a year of negative returns followed by 13 years of positive gains. The length of time you will have losses versus gains cannot be determined exactly, but historically the gains have far exceeded the losses. And since 1929, there have only been five major stock market crashes.

Synchronize the market with the time in the market

As tempting as it may be to try to sell your investments in order to avoid those losses, this attempt to synchronize the market could cause you to miss crucial recovery days. And the more days you run out, the lower your rate of return and end amount could be. The table below shows how $ 10,000 invested on January 2, 2000, would have increased by December 31, 2020, if fully invested, compared to some of the better days of the recovery.

Average annual rate of return (decline) Final value
Fully invested 7.47% $ 42,231
Best 10 days missed 3.35% $ 19,347
Best 20 days missed 0.69% $ 11,474
Best 30 days missed (1.49%) $ 7,400
Best 40 days missed (3.44%) $ 4,969
Best 50 days missed (5.21%) $ 3,430
Best 60 days missed (6.81%) $ 2,441

Data source: JPMorgan.

During that time, there were around 5,000 trading days, and missing just 60 of the best could have cost you around $ 40,000! In the same way that you have no idea when a market crash will occur, you also have no idea when a recovery will occur. That’s why, as difficult as it may be to stay invested during tough times, it’s in your best interests to do so.

Risk versus return

Your asset allocation model is your combination of stocks, bonds and cash. But it’s also the driving force behind your returns on investment. The more aggressive your investment portfolio, the higher your average rate of return. You will also see higher returns in years when the stock market is doing well, but worse returns when it is doing poorly.

For example, in 2008, a portfolio 100% invested in stocks would have lost 37%, a portfolio 100% invested in quality American bonds would have gained 5.24%, and a portfolio split equally between stocks and bonds would have lost 15, 88%. The following year, when the stock market rallied, you would have gained 26.5% if you had 100% large-cap stocks, 5.93% if you had 100% quality US bonds, and 16%. , 2% if you had 50% in each. .

If you are having trouble staying invested, it may be because you are being invested too aggressively. You can feel good when the stock market wins because you make more money, but more afraid when it crashes because you lose more. And because market timing is so difficult, you probably shouldn’t have different asset allocation models – you should pick one that you feel comfortable with in all market scenarios.

Stock market crashes aren’t fun, but they are inevitable. And avoiding them altogether is probably an unrealistic goal. Instead, learning ways to get through them mentally and emotionally can set you up for long-term success.