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Is this a good time to invest?

Key takeaways

  • When markets experience volatility, it's no surprise that some investors may want to keep their cash on the sidelines until it's clearer which way things may be headed.
  • For investors who can look beyond what's going on in the news and stay focused on the long term, down markets may present an opportunity.
  • Understanding the effects that recessions, volatility, bear markets, and investor behavior have had on portfolios is a key component to making more informed decisions about when and how to invest.

When there's some downbeat economic or market news, it's no surprise that some investors may end up fleeing the market for what they believe is safety or keep their cash on the sidelines until it's clearer which way things may be headed.

Unfortunately, they may be undermining their long-term growth potential. "In my experience, disciplined investors who develop a financial plan and stay invested have typically had better success reaching their long-term-financial goals," says Naveen Malwal, an institutional portfolio manager with Strategic Advisers, LLC. "I have found that investors who keep waiting for the perfect time to invest often miss out on gains over time."

While uncertainty, volatility, and recessions can be disruptive and disconcerting, when we look at historical trends, few economic events could be as damaging to the long-term growth of your portfolio than allowing fear to cloud your judgment.

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The potential danger of reactive decision-making

Over the last 30 years, studies have shown that when investors have given up on their long-term strategies and react to short-term developments in the market, their portfolios have suffered.1 Reactive behavior on the part of an investor can be a significant drag on performance. For example, since 1992, the average equity fund investor has underperformed the S&P 500 index, largely due to investor attempts to time the market. In 2022, for example, the average equity fund investor underperformed the S&P 500 by just over 3%.2

This chart shows that the average annualized return for the average equity fund investor between January 1, 1992 and December, 31 2022 was 6.81%, while the average annualized return for the S&P 500 was 9.65%.
Average equity investor as determined by Dalbar. Study source: Dalbar QAIB 2023 study, Morningstar, Inc. Past performance does not guarantee future results. The S&P 500 index is an unmanaged float-adjusted market capitalization-weighted index that is generally considered representative of the US stock market. Indexes are unmanaged. It is not possible to invest directly in an index. Data is provided for illustrative purposes only; it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance.

Part of the reason for this underperformance may be that investors might have an outsized impression of the impact that bear markets, volatility, and recessions may have on the long-term health of their portfolios. By making reactive or emotional decisions without the historical context, they may end up hurting their long-term growth prospects more than if they had simply ridden out the storm.

Putting the market environment into context

Consider the following reasons why an investor might be wary of investing when markets are volatile:

1. I'm worried about declines.

It's entirely possible that markets could decline. However, if you look back at previous bear markets, you'll see that staying out of the market could result in missing out on a potential recovery. Since 1950, stock market recoveries have often started soon after the bear market began, recovering a median of 7% during the rest of the same calendar year. Returns in the following years have historically shown even more promising results. Trying to time the market in an attempt to avoid losses or catch a rally is difficult or even impossible. It can often be a better idea to just get invested and stay focused on your long-term goals.

This chart shows that historically, bear markets are typically followed by recoveries, and that the median total cumulative return for the remainder of the calendar year following the bear market is 7%. For 1, 3, and 5 years after, the median total cumulative return was 19%, 52%, and 68%, respectively.
Past performance is no guarantee of future results. Source: Strategic Advisers LLC, Bloomberg Finance, L.P.
*Year occurred during a recession, as defined by the National Bureau of Economic Research (NBER), as of 2/5/2024.

2. I don't want to invest during the late part of the business cycle because I expect a recession to follow.

Being picky about when to enter the market based on where we believe the US economy is in the business cycle is unlikely to dramatically affect returns. When looking at investments made at different stages of the business cycle, the difference in average long-term performance has been very small over time.

This chart shows that regardless of whether assets are invested during the early, mid, or late part of the business cycle, or even in a recession, the range of expected returns and average expected returns are roughly similar.
*Real return is the total return of an investment less the rate of inflation.
For illustrative purposes only. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Sample portfolio: 36% US stocks, 24% international stocks, 40% IG bonds. See disclosures for index definitions. This historical analysis is based on Monte Carlo analysis based on historical index returns. "Range of expected returns" illustrates simulations between the 25th and 75th percentile. The simulations represent an 85% confidence interval. Actual returns could potentially be higher or lower. Portfolio based on Dow Jones US Total Stock Market Index, MSCI ACWI ex-US Index, Bloomberg US Aggregate Bond Index, as of 12/31/2023.

Additionally, while recessions are certainly stressful and can present significant challenges to investors, they have often been relatively short and, historically, have been followed by larger, longer expansionary periods in which stocks have seen gains. "Since 1950, the US has gone through 11 recessions and many other challenges," says Malwal. "But stocks have finished higher than where they started in 5 out of 11 of those recessions. So not all recessions have led to stock market declines. And stocks have experienced about 15% annual returns since 1950, despite multiple setbacks over time."

This chart shows that most recessions are short and shallow compared to the longer, larger expansionary periods that follow.
Past performance is no guarantee of future results. This chart illustrates the cumulative percentage return of a hypothetical investment made in the S&P 500 Index during periods of economic expansion and recession. Index returns include reinvestment of capital gains and dividends, if any, but do not reflect any fees or expenses. This chart is not intended to imply any future performance of an investment product. It is not possible to invest directly in an index. All indexes are unmanaged. Please see disclosures for index definitions. Source: Bloomberg, S&P 500 Index total annual return, 1/1/1950–12/31/2023; recession and expansion dates defined by the National Bureau of Economic Research (NBER).

3. I feel safer with my money in cash

While keeping your money in cash may seem like a wise decision when uncertainty is high and markets are unpredictable, the sense that it's risk free is somewhat of an illusion. Though your account balance may appear stable, inflation can eat away at its value over time, reducing your purchasing power. Furthermore, cash has historically tended to meaningfully underperform stocks and bonds when the Federal Reserve has stopped hiking interest rates. On average, stocks, bonds, and a diversified portfolio have outpaced cash as soon as 1 year after rate hikes end.

This chart shows that stock market volatility is mostly an issue in the 6 months preceding and the 6 months following the start of the Federal Reserve's tightening cycle.
Past performance is no guarantee of future results. Total returns of cash, the Bloomberg US Aggregate Bond Index, the S&P 500 Index, and a 60% stock/40% bond and cash portfolio as soon as one year after the hiking cycle ends. It is not possible to invest directly in an index. All market indexes are unmanaged. Index performance is not meant to represent that of any Fidelity mutual fund. Cash—Bloomberg 1-3 Month US Treasury Bill Index; bonds—Bloomberg US Aggregate Bond Index; S. stocks—S&P 500 Index. Sources: Bloomberg, AART, August 1969 to December 2019.

Maintaining composure is key

Understanding the relative effects that recessions, volatility, bear markets, and investor behavior have had on portfolios is a key component to making more informed decisions about when and how to invest. However, even this knowledge may not be enough to assuage investor anxiety when the market declines and portfolios suffer. Thankfully, there are methods available to help investors avoid reactive decision-making.

  • Make sure you have an emergency fund. Knowing you have enough money on hand to cover your essential expenses and any unexpected needs that might crop up in the event of an emergency can help give you the confidence to let your long-term investments remain in the market. (Learn more about establishing and maintaining your emergency fund.)
  • Consider dollar-cost averaging. Instead of investing large sums of money all at once, dollar-cost averaging involves investing a portion of that sum on a regular schedule, perhaps monthly, regardless of what direction the market is heading in. Over time, this may help you purchase more shares when prices are lower. (Learn more about dollar-cost averaging during bear markets.)
  • Consider investing defensively. Some economic sectors have been particularly resilient in down markets, especially those that offer essential goods and services, such as utilities, health care, and consumer staples. While past performance is never indicative of future results, investing in defensive sectors such as these can help investors feel prepared for what may come. (Learn more about defensive investing.)
  • Explore a professionally managed account. With a managed account, investment professionals can help tailor a diversified portfolio in accordance with your goals and risk tolerance. These professionals manage your account based on these preferences and in accordance with a disciplined process of investing and asset allocation that helps to remove emotional or reactive decision-making from the equation. There are different types of professionally managed accounts, but all are geared toward providing you with the information, expertise, and resources to help stay on track during difficult market conditions. (Learn more about professionally managed accounts.)

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More to explore

1. "Dalbar QAIB 2022: Investors are Still Their Own Worst Enemies," Index Fund Advisors, April 3, 2023. 2. "Investors Panic in 2022 and Lose More than Indices Suggest," DALBAR, Inc., March 30, 2023.

Investing involves risk, including risk of loss.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The Dow Jones US Total Stock Market Index is an all-inclusive measure composed of all US equity securities with readily available prices. This broad index is sliced according to stock-size segment, style, and sector to create distinct sub-indexes that track every major segment of the market. The MSCI All Country World Ex-US Index (Net MA) is a market capitalization–weighted index designed to measure the investable equity market performance for global investors of large- and mid-cap stocks in developed and emerging markets, excluding the United States. The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, US dollar–denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate pass-throughs), asset-backed securities, and collateralized mortgage-backed securities (agency and non-agency). The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.

Past performance is no guarantee of future results.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

The utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation.

The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

The consumer staples industries can be significantly affected by demographic and product trends, competitive pricing, food fads, marketing campaigns, environmental factors, government regulation, the performance of the overall economy, interest rates, and consumer confidence.

"Fidelity Managed Accounts" or "Fidelity managed accounts" refer to the discretionary investment management services provided through Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser.  These services are provided for a fee. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, FBS, and NFS are Fidelity Investments companies.

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