With concerns about volatility rising, understanding what happens during a market crash or recession is critical.
Short-Term Losses Are Almost Certain
“The market's long-term future is still bright,” but in the short term, uncertainty dominates. “Nobody knows what the market will do in the short term. However, if we face a bear market, crash, or recession, your investments will almost certainly lose value.”
In some situations, the drop can be extreme. “During the Great Recession, for example, the S&P 500 lost more than half of its value between 2007 and 2009.”
The impact on individual portfolios can be severe:
- “If you'd had $10,000 invested in an S&P 500 ETF in December 2007, that investment would have been worth around $4,600 by March 2009.”
Losing Value Isn’t the Same as Losing Money
Despite steep declines, the article emphasizes a key distinction. “The good news, however, is that losing value is not necessarily the same as losing money.”
“The only way to lose money in the stock market is to sell your investments for less than you paid for them.”
- “If you'd bought your S&P 500 ETF shares for $10,000 and sold them for $4,600, you'd have locked in losses of more than $5,000.”
- “But if you'd simply held your investment until the market recovered, it would have regained all of its lost value without you losing anything.”
Long-Term Investing Remains Critical
Historical performance highlights the importance of patience. “If you'd invested $10,000 in an S&P 500 ETF in December 2007 and held it for 10 years, you'd have more than doubled your money.”
“A long-term outlook is your best friend when you're investing in the stock market.”
The article adds: “No matter how rough the short term may be (and it can be nauseating at times), the market as a whole is all but guaranteed to see positive total returns over a decade or two.”
Not All Stocks Survive Market Crashes
While the broader market has consistently recovered, individual companies may not. “The market itself has a flawless track record of recovering from crashes and recessions, but that doesn't mean that each individual stock will pull through.”
“If you're investing in shaky companies that aren't strong enough to survive volatility, there is a good chance you'll lose money during a recession.”
The article stresses that price alone isn’t a reliable indicator:
- “Stock price alone isn't necessarily indicative of a strong company.”
- “Even weak organizations can thrive when the market is soaring and investors are excited to buy.”
Instead, fundamentals matter most: “Healthy organizations that are on solid financial footings and have clear advantages over their competitors are far more likely to bounce back.”
Strong Companies Are More Likely to Recover
Even strong companies are not immune to short-term declines. “They might still lose value in the near term, but that's normal.”
However, patience improves outcomes: “If you hold these stocks for at least a few years, your portfolio has a much better chance of surviving even the worst market crash or recession.”
S&P 500 Consideration and Stock Selection
The article also raises a broader investment question: “Should you buy stock in S&P 500 Index right now?”
It notes that alternative stock picks may outperform. “The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them.”
Past examples highlight potential upside:
- “When Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $495,179!*”
- “Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,058,743!*”
The performance comparison is emphasized: “Stock Advisor’s total average return is 898% — a market-crushing outperformance compared to 183% for the S&P 500.”
Key Takeaway
The central message remains consistent throughout:
- “Your investments will almost certainly lose value” during a crash.
- “Losing value is not necessarily the same as losing money.”
- “A long-term outlook is your best friend.”
The difference between panic and patience ultimately determines whether a downturn becomes a temporary setback or a permanent loss.
