What if we were to start investing right as the stock market starts to crash and enter a bear market?
In this post we run the numbers to find out exactly how our investments would perform if we were unlucky enough to start at the worst possible time.
One of the big concerns new investors often have is what will happen if they start putting their hard earned money into the stock market right before a crash.
In this post we dig into the numbers to answer the question, what if I start investing right before the stock market crashes?
Looking back over the last few decades, the stock market has given us a wild ride. We've got the tech boom and crash of the 2000's which almost cut the value of the S&P 500 in half and resulted in 2 years of downward pressure in the stock market. Then we've got the housing crash of 2008 which again halved the value of the S&P 500, taking several years to recover. Now in 2020 we have the Corona Virus which has yet to fully play out.
With so much volatility in the stock market it's understandable why new investors might get nervous about putting their money into the market right before a crash.
The market reached an all time high in October of 2007 at which point it began crashing and continued to do so until finally reaching the bottom in February of 2009. The market then began its slow climb back up which took until 2013 to make a new all time high.
Time to dig into the numbers to see what would have happened if you started investing in the stock market just as it began the 2008 crash and ensuing bear market.
Let's say we begin purchasing $1 000 of the SPY ETF every month starting in October 2007 right as the market crashes and continue to do so all the way through the recession until we eventually reach a new high in 2013.
The following chart shows us the following:
From October 2007 through to April 2013 we would have put $67 000 into the market. At the end of that period our investment would've been worth $84 790. In fact, it would've been worth more if we reinvested all the dividends received during that time.
So on the one hand if we succumbed to our fear of the stock market crash and chose not to invest our money during a bear market we would be sitting with $67 000. However conquering that fear and uncertainty and focusing on the long term power of the stock market allowed us to grow our money by 26%.
Now that we know the best course of action is to just continue investing even during a bear market, lets take this a step further.
The below chart shows the SPY ETF during the 13 year period spanning 2000 to 2013. This period includes both the 2000 tech crash and the 2008 housing crash.
As you can see, the market spent 13 years going side ways. Sure it moved a lot during that time, but ultimately we spent 13 years stuck in a side ways range.
Lets once again do the same experiment where we begin investing in July 2000 just as the stock market starts to crash. We then diligently add $1 000 to our investment every month for the next 13 years despite the fact that we had to live through two crashes, recessions and ensuing recoveries.
Here again we have our SPY ETF chart overlaid with the amount we invested over time and the value of that investment.
From July 2000 through to April 2013 we would have put $308 000 into the market. At the end of that period our investment would've been worth $406 385. Once again, this excludes dividends which would have super charged our investment even more.
We've managed to grow our money by roughly 32% in a market that:
That's really incredible and highlights the power of diligently investing every month regardless of all the fear and uncertainty around us.
In this post we purposefully illustrated how our investments would have performed were we to start just as the market starts to crash. All things considered, we did pretty well.
However keep in mind that this shows how even the worst case scenario wasn't too bad provided we stayed the course.
Now consider that in all likelihood if you're just starting out with your investments you're probably not going to experience a market crash right as you begin investing in which case you'll do even better than the above examples.
The key take away here should be, stay the course and focus on the long term. Instead of being scared of investing during a recession or market crash, think of it as getting in at lower prices when everything is on sale.
Article by Brendon @ Money FI