We’ve all heard advice to stick with it in times of volatility. As Warren Buffett famously said, “Investing is all about picking good stocks at good times and sticking with them as long as they’re still good companies.”
However, when investors watch their portfolios fall month after month, heeding this advice is easier said than done.
If you’re anything like me, then you’re a visual learner who appreciates the power of fact charts.and with S&P 500 In a bear market, investors may be looking for reasons why they should be patient and wait in their favor. Here’s a visual guide to the strengths of holding on to market cycles that can help you stay on track to achieve your long-term financial goals.
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How long will it take for the S&P 500 to reach a new all-time high?
If you’ve been investing for a while, you’ve likely heard that buying at the top of a market before a bear market has historically produced positive returns over time. In other words, if you bought at the worst time before the financial crisis or the dot-com bubble burst in the early 2000s, you can still make money if you’re patient and don’t sell.
That’s good information, but a better question is to ask how long the S&P 500 has gone without hitting an all-time high.
In the past 70 years, the S&P 500 has never set an all-time high for eight years. This means that even if you buy at the worst time of the market cycle, you have to wait less than eight years to break even.
The log scale chart above shows the S&P 500’s 70-year return, with a single-day all-time high in orange. The gray vertical rectangle shows the U.S. recession.
Just looking at the chart, it’s clear that the long-term returns for the S&P 500 have been excellent — averaging about 8% per year. You’ll also notice that the orange line is flat in the 1970s and 2000s. Let’s zoom in on these periods.
Several periods took about seven and a half years to recover to record levels. One ran from January 1973 to July 1980:
Likewise, starting in 2000, the dot-com bubble burst the market. It wasn’t until October 2007 that the S&P 500 reached a new all-time high.
However, that high was short-lived, and it has since taken another four and a half years for the S&P 500 to reach record levels again.
Some readers might think that we are in another seven-year period of market calm. We probably are. But the silver lining in sideways markets over the past few years is that the next few years tend to yield extraordinary returns.
During the seven-year period from 1980 to the end of 1986 (including two recessions), the S&P 500 produced a 124% return.
From 2013 to the end of 2019, the S&P 500 returned 163%.
All in all, even during the worst market downturns, the S&P 500 tends to make all-time highs in less than eight years before producing above-average performance in the following years.
Patience is essential
No one knows how long the bear market will last, or how many months or years it will take for the S&P 500 to reach its all-time high. But what we do know is that, on a macro level, the worst market times don’t last long.
It’s easier for investors to be patient if they only invest in things they don’t need anytime soon. Hopefully by now you have a better understanding of the worst-case scenarios in the market in history, and you can take comfort in knowing that those worst-case scenarios weren’t too bad after all.
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Daniel Foelber has no positions in any of the above stocks. The Motley Fool has no positions in any of the stocks listed above. The Motley Fool has a disclosure policy.