Winston Churchill once said, “Those that fail to learn from history are doomed to repeat it,” and it holds true – particularly when it comes to investments. Historical investment data can be complex to decipher, but this chart from Capital Group does an excellent job at illustrating the relationship between market downturns and recoveries:
Takeaways From Historical Data
What can we learn from historical investment data?
First – we can’t time the market. Looking at a chart like the above from Capital Group, deciding when to hop in or out and trying to time your investments isn’t a bright idea.
We can also learn that the upside tends to be more promising than the downside. While downturns are an inevitable part of the market cycle, we also experience more market recoveries in general than we do downturns. Because the stock market is based upon the corporate world, we can have hope that the market won’t likely go to zero as it would leave the corporate world valueless – it’s just a highly unlikely scenario. On the flip side, the positive return is theoretically limitless and on average is 2.5 times over 100%, which just isn’t feasible on the downside.
While you can’t time the market, timing can cloud your judgment. If you start investing during a down period, it can feel like you’re stuck in a bad place – whereas if you had started during an upswing and you’re still on the way up, things would feel good. It’s important to remember that the market naturally goes up and down, and that investing is a long-term experience that you can’t look at during a few week period on it’s own. Downturns are a normal part of the process, and they will continue to happen – but so will recovery.
What Makes A Difference
When it comes to history, and your investments, Winston Churchill has another quote that you may want to keep in mind, “Attitude is a little thing that makes a big difference.” When you’re facing a down market year and feel like it won’t ever turn around, or your investments are worth less than they were in months before, keep in mind that your attitude will make a big different and that investing is a long term process – and that in general, there’s more upside than downside.
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