When the economy is in recession, the stock market goes down. Quite frequently, it does not start to drop until the recession has begun, but usually it rebounds significantly before the recession ends. However, we do not always know when a recession begins until much later: the start date of the recession that began in December 2007 was not announced until a year later. Likewise, the ending date of a recession is often not known for a similar length of time.
Give all this uncertainty about the beginning and ending dates of recessions, when is a good time to buy stocks? Should you wait until the recession is officially over? Should you wait until the market begins to rebound? There are many people who think they know the answers to these questions.
Here in March of 2009, we are 16 months into a recession. Suppose that we had bought stocks at this point in each of the last dozen or so recessions, what average return would we have received? To examine this question, let’s look at the performance of the Dow Jones Industrial Average. Let’s assume that you had bought “the market” 16 months after the beginning date of each of the last 13 recessions. This is a period of about 80 years. Further, let’s assume that you held the stocks for a 10-year period.
The average ten-year return would have been 107%. Only once would your return have been negative: if you had bought 16 months after the long economic downturn at the beginning of the Great Depression, your return would have been -20%. If you had bought 16 months after the beginning of the recession that began in December 1969, your 10-year return would have been 5.9%. However, buying at that time in three of these recessions would have allowed you to get a 10-year return greater than 200%.
But, on average, if you had bought 16 months after the beginning of each of these last 13 recessions and held for 10 years, you would have had an average 10-year return of 107%. Sounds like a good time to buy, right? Before you jump at this, it might be useful to look at the average 10-year return had you bought at any random time since 1929. What do you think would have been your average 10-year return? Ready for this? Your 10-year return would have been 107%!
This is really yet another example of how hard, or impossible, it is to time the market. In general, buying the market and holding for 10 years has led to a respectable yield, on average, no matter when you bought. The key is not to be in a position when you are forced to sell in less than 10 years.