Data which helps investors keep a cool head in a crisis

Stock market investing is very risky in the short run but less so in the long-run – unlike cash

Percentage of time where investors would have lost money in inflation-adjusted terms

percentage of time where investors would have lost money

Past performance is not a guide to the future and may not be repeated.

Stocks represented by Ibbotson® SBBI® US Large-Cap Stocks, cash by Ibbotson® SBBI® US (30-Day) Treasury Bills. Data January 1926-January 2022. Source: Morningstar Direct, accessed via CFA institute.

Using almost 100 years of data on the US stock market, we found that, if you invested for a single month, you would have lost money 40% of the time in inflation-adjusted terms (specifically that’s 460 of the 1,153 months in our analysis).

However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money slightly less than 30% of the time. Importantly, 12-months is still the short-run when it comes to the stock market. You’ve got to be in it for longer.

On a five-year horizon, that figure falls to 23%. At 10 years it is 14%. And there have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms.

Losing money over the long run can never be ruled out entirely and would clearly be very painful if it happened to you. However, it is also a very rare occurrence.

In contrast, while cash may seem safer, the chances of its value being eroded by inflation are much higher. And, as all cash savers know, recent experience has been even more painful. The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon.

10%+ falls happen in more years than they don’t – but long-term returns have been strong

The biggest stock market falls of each calendar year

 the biggest stock market falls of each year

Past performance is not a guide to the future and may not be repeated.

Source: Refinitiv and Schroders. Data to 31 December 2021 for MSCI USA index.

In the days after Russia’s invasion of Ukraine, global stock markets had fallen by 10% from their earlier peak.

10% may feel like a big fall but it’s actually a regular occurrence. The US market has fallen by at least 10% in 28 of the past 50 calendar years – that’s more often than not. In the past decade, this includes 2012, 2015, 2016, 2018 and 2020.

The key point to note is that despite these regular bumps along the way, the US market has returned 11% a year over this 50 year period overall.

The risk of near term loss is the price of the entry ticket for the long term gains that stock market investing can deliver.    

Bailing out after big falls could cost you your retirement

Bad news and uncertainty of any sort can cause volatility in markets. When that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash.

However, our research shows that, historically, that would have been the worst financial decision an investor could have made. Switching from the stock market to cash after an initial market fall pretty much guarantees that it would take a very long time to recoup your losses.

For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the stock market. And remember, the stock market ultimately fell over 80% during this crash. So, shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy.

Similarly, an investor who shifted to cash in 2001, after the first 25% of losses in the dotcom crash, would find their portfolio still underwater today.

The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run.

Giving up on the stock market after big falls can be a bad financial decision

Number of years to recoup initial losses

giving up on the stock market

Past performance is not a guide to the future and may not be repeated.

Source: Federal Reserve Bank of St. Louis, Robert Shiller, Schroders. Monthly cash return 1934-2020 based on 3-month Treasury bill, secondary market rate; 1920-1934 based on yields on short-term United States securities; 1871-1920 based on 1-year interest rate. 1871-1920 data only available annually so a constant return on cash has been assumed for all months during this period. Other data is monthly. All analysis is based on nominal amounts.

As with all investment, the past is not necessarily a guide to the future but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock market investing than might have been expected.

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