Recent declines in consumer confidence to a 17-month low in December have reignited concerns about an impending recession. Concurrently, with the S&P 500 index reaching new record highs this month, there is growing speculation among investors that the market may be poised for a downturn. The juxtaposition of economic pessimism and market peaks brings to mind the challenges associated with market timing.
Legendary investors have long cautioned against attempting to predict market movements. Nevertheless, it is instructive to explore what outcomes might result from investing at market peaks. To investigate this, consider a hypothetical investor, whom we will call Joe, who invested $10,000 into index funds tracking the S&P 500 at five notable market tops over the prior 60 years. Each investment was made at the worst possible times - precisely before significant market declines or prolonged flat periods.
Investment Scenario 1: December 1965
The first investment coincides with one of the most challenging periods in market history, exactly 60 years ago from December 1965. Between then and October 1981, the S&P 500 delivered an average annual return of just 1.7%. While this period did not include a distinct market crash, valuations were notably excessive. This assessment aligns with commentary from Warren Buffett in 1999, who noted the Dow Jones Industrial Average remained virtually unchanged for 17 years following December 1965, posting gains below 1% during that time.
For Joe, this meant his $10,000 investment grew to approximately $13,600 by 1981. This represents a 31% increase over nearly 16 years, a rate that falls short of keeping pace with inflation adjustments during the same interval.
Investment Scenario 2: October 1987
Joe’s second attempt at market timing occurred just before the infamous "Black Monday" crash on October 19, 1987, when the S&P 500 plummeted approximately 30% in a single trading day. Consequently, Joe's $10,000 immediately declined to around $7,000, illustrating the hazards of investing immediately ahead of sudden market collapses.
Investment Scenario 3: March 2000
The third investment took place at the peak of the dot-com bubble. Although the Nasdaq is typically highlighted concerning the dot-com collapse, the S&P 500 also endured significant losses. After peaking in March 2000, the index lost nearly half its value over the subsequent 18 months. Joe's initial $10,000 investment deteriorated to about $5,000 by September 2002. A recovery to the original investment level did not materialize until 2007.
Investment Scenario 4: October 2007
The fourth installment came just before the financial crisis that unfolded between 2008 and 2009. Although the crisis escalated in September 2008, the S&P 500 reached its last peak in October 2007. Joe’s $10,000 investment dropped to less than $5,000 within two years, mirroring the decline of the index from 1,549 in late 2007 to a low of 666 in March 2009. While the market eventually recovered, reaching its previous high only by March 2013, Joe's investment remained essentially stagnant for nearly six years.
Investment Scenario 5: February 2020
Finally, Joe invested $10,000 just prior to the COVID-19 pandemic, when the S&P 500 achieved a record high on February 19, 2020. Despite the subsequent 26% drop in the following month, the market rebounded relatively swiftly. Nonetheless, this episode illustrated the pitfalls of purchasing near short-term market highs instead of during the dip.
Overall Outcome
Despite unfavorable timing in each investment, holding these positions through market recoveries yielded substantial growth in the long run. Specifically, the December 1965 investment grew to approximately $757,120, the October 1987 purchase reached about $308,150, the March 2000 stake increased to $50,120, the October 2007 amount became $44,760, and the February 2020 investment grew to $20,450.
In total, Joe’s $50,000 invested across these five poorly timed moments appreciated to about $1.18 million over the subsequent decades. This analysis underscores the enduring wisdom that maintaining investments over time generally outweighs attempts at perfect market timing.
While the economic landscape is often accompanied by serious challenges — stagflation in the 1970s, Cold War tensions, the 9/11 tragedy, the Great Recession, and a global pandemic — history indicates that steadfast and patient investors have succeeded in overcoming these periods. It is reasonable to expect future crises as well, but the data confirms that measured, long-term investment strategies provide resilience.