Stock Market Crashes Can Help Long-Term Investors

But does it make sense to invest in stocks now? he asked.

I explained that I couldn’t give advice on buying particular stocks, and instead favor index funds of the type she already owns. Those funds eliminate the risk of owning the wrong specific stock at the wrong time. Index funds that track broad markets have provided an easy and inexpensive way for ordinary investors to capture the broad returns of the financial markets since John C. Bogle made them available at Vanguard in 1976.

But with the stock market in a wide slump since the beginning of this year, and bonds falling as well, that may not seem like saying much. Despite occasional rallies, the S&P 500 is down nearly 18 percent for the year. Bonds have also lost money. My personal portfolio, which includes bonds and stocks, has lost about 13 percent.

Oh! I’m not happy about it.

But I accept that I cannot predict the short-term movements of the market.

On the other hand, no one can do that consistently. Despite all the words written and spoken on the subject, they do not amount to real knowledge.

“Where is the market going tomorrow? We have no idea,” Savina Rizova, head of research at Dimensional Fund Advisors, an asset management firm, said in an interview Tuesday.

Dimensional isn’t trying to make short-term bets, he said. Still, he said, the financials suggest what is likely to happen in markets over extended periods of 10 to 20 years or more.

“We know from history that there are higher expected returns on stocks than Treasury bills or cash,” he said. Because daily returns are unpredictable, if you try to get in and out of the market at the perfect time, you are likely to miss out on some of the biggest days in the market. They can occur at any time, even during long periods of decline.

Dimensional analyzed the S&P 500 from January 1, 1990 through December 2020. It found that $1,000 invested in the index produced these returns:

  • $20,451 if fully invested for the entire period.

  • $18,329, if he missed the single best day during those 31 years, a gain of 11.6 percent on October 13, 2008.

  • $12,917, if you missed the best five days.

  • $7,080, if you missed the best 15 days.

  • $4,376, if you missed the best 25 days.

Based on numbers like these, Rizova said, it makes sense to put money into the stock market as soon as possible. “You could miss out on a great day, and if you miss those, you’ll miss out on a lot of the perks,” she said.

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