o Many investors today are worried about a recession.
o For investors with longer time horizons, investing during a recession is almost unavoidable.
o The good thing is that for long-term investors staying invested matters more than a recession.
After the dramatic events in the banking sector, many investors are worried about a potential recession, and for a good reason. Recessions have real-world impacts on people’s financial security and well-being. Thankfully, recessions don’t happen that often. Historically, we experience a recession about every 7.5 years.1 The longer your investment time horizon, the more likely you are to experience a recession. This can be an incredibly challenging experience. The good news is that for long- term investors, recessions don’t actually matter that much.
Time heals all wounds (mostly)
The chart on the right shows the average performance for a 60/40 portfolio2 over short time horizons (rolling one-year periods, in blue) and over long time horizons (rolling ten- year periods, in green). We then separate those returns into periods that included a recession (“Recession”) and periods that did not include a recession (“No Recession”). Looking at the two blue bars on the left, you can see that over the short-term, periods with recessions were meaningfully lower than periods without recessions
Over longer time horizons, however, the impact of recessions is only marginal. Looking at the two green bars on the right, you can see that over the long-term, periods with recessions were only 0.6% lower than periods without recessions (average ten-year return of 10.0% without recessions, compared to 9.4% with recessions). This is because longer periods tend to include full market cycles, which include both drawdowns and recoveries. To put that 0.6% difference in perspective, if you were uninvested for as little as six months during an average ten-year period, it would have the same return impact as a recession!3
Investing in the face of a possible recession is really hard. The good news is that recessions don’t impact long-term returns that much. Over the long term, getting invested (and staying invested) is much more important than trying to time the next recession. We encourage investors to avoid a “self-inflicted recession” by maximizing their time in the market using a long-term investment strategy.
1 Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from 1855 to 2023
2 All 60/40 returns cover the period 1940 to 2022. 60/40 returns are composed of 60% S&P 500/40% US fixed income proxy. US
fixed income proxy is composed of a combination of 5-year and 10-year US Treasury returns (from 1940 to 1976) and the US BBC Aggregate index (1976 to 2022). Sourced from Morningstar and Bloomberg
3 If an investor holds cash (bank savings) for half a year, and then invests in a portfolio which consistently returns 10.0% (average annual) for nine and a half years, the return over a ten-year period would be 9.4% (average annual). Assumes a 0.23% (annual) bank savings rate (the average bank savings rate on March 1, 2023, per bankrate.com).