Recessions can be uncomfortable times, with unemployment often up and business growth often stalling or declining. They can be triggered by a financial crisis, rising inflation, or various other events. Recessions are often accompanied by significant stock market downturns too, and they can make many investors nervous.
Here are some reasons why you don't have to worry about recessions as an investor -- especially if you've positioned yourself to prosper despite them.
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1. The stock market will always go up and down -- but mostly up
The first thing that all investors need to understand and remember is that the stock market can be quite volatile at times, and you can (and should) expect occasional pullbacks. On average, according to the Schwab Center for Financial Research, the stock market experiences a correction -- a drop between 10% and 20% -- about every other year. (That's based on the 20 years between 2001 and 2021.)
Schwab also points out that most such drops are followed by recoveries fairly soon: "Despite these pullbacks, however, stocks rose in most years, with positive returns in all but 3 years and an average gain of approximately 7%." Stock market analytics company Yardeni Research looked at data going back to 1950, and found corrections happening about every 1.9 years, with fully 32 of them lasting less than a year -- and 24 lasting less than four months.
2. People have gotten wealthy despite market volatility
Clearly the stock market doesn't go up in a straight line. The line is jagged -- going both up and down at various times. Over the long haul, though, it has gone up. Think of the best investors and those who have built great wealth by investing in stocks: They've generally achieved their success by sticking to their plan and remaining invested in the stock market through small corrections and big stock market crashes.
Warren Buffett, for example, has grown the value of his company, Berkshire Hathaway (BRK.A -2.20%) (BRK.B -2.03%) by an annual average of nearly 20% since 1965. (The S&P 500 averaged a solid 10% in annual gains during the same period.) Buffett's wealth comes partly from the many businesses he has bought in their entirety, but also from substantial stock investments. He and others have built their wealth despite 1987's Black Monday crash, when the Down Jones Industrial Average plunged by 22% in a single day, and despite the dot-com bubble bursting in 2000, taking the Nasdaq Composite Index down more than 75% by 2002.
The financial crisis of 2008 and 2009 saw the Dow Jones Industrial Average shedding more than half its value at one point, and that was certainly enough to drive many investors out of the market. (Indeed, falling stock prices are an indication of investors selling.) But those who hung on saw the market recover over time, and go on to set new record highs.
3. Dollar-cost averaging can help
You can aim to reduce your stress and worry about stock market crashes by engaging in dollar-cost averaging. That means investing set sums in the stock market at set intervals, no matter whether the market is up or down. (You are probably doing it if you're having money from your paycheck regularly plunked into certain investments in a 401(k) account.)
The beauty of dollar-cost averaging is that you don't have to think too much about whether you're in a bull market or bear market. If the market is down, your infusion of cash will buy you more shares. If it's up, you'll end up buying fewer shares.
To simplify your investing even more, consider dollar-cost averaging into a low-fee, broad-market index fund. It's easy, and index funds have actually outperformed most managed stock funds over long periods.
4. Dividends from strong companies can help too
Finally, consider including shares of healthy and growing dividend-paying stocks in your portfolio. They can help you stress less about market downturns and recessions because they'll tend to keep delivering regular infusions of cash into your account no matter what the economy is doing. Better still, healthy and growing dividend payers tend to increase their payouts over time, too -- often outpacing inflation.
Not all dividend-paying stocks are equally attractive, though. If one is struggling, it might temporarily or permanently reduce, suspend, or eliminate its dividend. But companies will try hard not to have to do that.
If you take the above perspectives to heart and perhaps do some dollar-cost averaging into index funds and perhaps add some strong dividend payers to your long-term portfolio, you'll likely sail through recessions as you amass long-term wealth.
