During a recession, getting spooked and selling off your ASX shares in a panic is easy. But the truth is, staying invested through the highs and lows of the market often leads to the best long-term outcomes.
Historical data clearly shows that trying to time the market – especially during volatile periods – can backfire, leaving you with lower returns than if you'd stayed put.
The key reason? Many of the market's best days come during the most turbulent times.
For ASX investors, this means that you could miss out on significant gains if you're not in the market during these critical moments. Let's see why it's important to stay invested even during a recession.
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'Time in' the market: better than 'timing' the market
Timing the market might seem like a smart move – sell high, buy low – but in reality, even seasoned investors struggle to get it right.
According to JP Morgan's 'Principles for a Successful Retirement' study, missing just a handful of the best-performing days can have a massive impact on your returns.
Let's look at the numbers.
If you had invested $10,000 in the S&P 500 Index (SP: .INX) (a measure of the US market) from 2004 to December 2023 and stayed fully invested, your portfolio would have grown to $63,637.
However, if you missed just the 10 best days during that same period, your portfolio would have shrunk to $29,154. Miss the 20 best days? You're down to $17,494.
Missing the top 50 days? Your portfolio would have shrunk by 90% versus the buy-and-hold investor. That's a staggering difference.
The reality is that the best days in the market are often unpredictable, many of which occur during periods of heightened volatility.
| Scenario (Using S&P 500 Index) | Amount ($USD) |
| Fully Invested (Jan 1 2004 – Dec 29 2023) | $63,637 |
| Missed 10 best days | $29,154 |
| Missed 20 best days | $17,494 |
| Missed 30 best days | $11,483 |
| Missed 40 best days | $7,898 |
| Missed 50 best days | $5,664 |
| Missed 60 best days | $4,179 |
The data also shows that many of the best days come immediately after the worst days – 70% of the best and worst days occur within two weeks of each other.
For example, some of the best-performing days during the COVID-19 pandemic happened right after significant market drops.
The second worst day of 2020 was "immediately followed by the second best day of the year".
So, pulling out of the market in a panic means you risk missing those key recovery periods. JP Morgan puts it well:
Losses hurt more than gains feel good. Market lows can result in emotional decision making.
Taking "control" by selling out of the market after the worst days is likely to result in missing the best days that follow. Investing for the long term in a well-diversified portfolio can result in a better retirement outcome.
What about buying ASX Shares in a recession?
Holding tight is one thing. But should you be buying ASX shares during a recession? According to experts like Richard Temple from Lazard Asset Management, the answer is yes.
Temple advises keeping a long-term perspective, noting that market downturns offer a unique opportunity to buy quality stocks at lower prices.
Overall, the lesson of history is that owning equities over time is among the best investment options, but it is important to be fully invested through the cycle and to not try to time the markets. I
n fact, one recent analysis indicated that over the 20 years from 2003 to 2022, investors who missed the 10 strongest up-days in the US equity market forfeited over half of the total return from the entire investment period.
Recessions often present opportunities for investors to pick up strong companies at a discount. These downturns are temporary, but the gains you can capture by staying invested or even adding to your positions can have lasting benefits.
If you're out of the market during these crucial days, you're missing the best chances for recovery and growth.
Foolish takeout
Trying to time the market, especially during a recession, is a risky game that most investors lose. The data is clear: staying invested, even during market downturns, is the best way to ensure long-term success.
