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What’s the Best Way to Invest When Markets Are Shaky? Here’s What History Tells Us


What should you do with your money during a bear market? That’s the question many investors have been asking since the S&P 500 officially entered bear market territory last summer.

On one hand, investors may see the current market environment as an opportunity to buy stocks at a discount. On the other hand, it’s practically impossible to know whether prices have hit bottom or will plunge further.

Is now the time to pull back from the market or go in full-throttle? Maybe finding a happy medium is best? With these questions in mind, we analyzed the bear markets of 2001 and 2008-2009 to see how different approaches would have played out for three hypothetical investors. While every bear market has a unique set of circumstances that should be considered, looking at historical data can provide a gut check before acting emotionally or rashly to current market conditions.

A financial advisor can help you make a plan for your money in a down market. Find an advisor today. 

Our Analysis

For our analysis, we assumed the three hypothetical investors each have $100,000 to invest. We’re approximately eight months removed from the initial calls of the most recent bear market, and we aimed to mirror that in our analysis. We assume each person invests their money eight months after bear markets were initially called in 2001 and 2008. We then calculated how much each investor would have had by the end of 2022.

Our Investors

The first is ultraconservative and chooses to simply hold his money in certificates of deposit (CDs). We’ll call him the Holder.

The second investor is the opposite: She’s uber-aggressive and invests the full $100,000 all at once eight months after the markets head into bear territory. We’ll call her the Buyer.

The third investor takes a more measured approach known as dollar-cost averaging. The strategy involves regularly investing his $100,000 in equal increments every month. Doing so means he’ll buy into the market at varying prices, ensuring that he doesn’t invest all of his money when prices are highest. We’ll call him the Dollar-Cost Averager. (Note: Dollar-cost averaging is how many retirement savers approach investing. It’s an accessible style for most, especially if you don’t have $100,000 upfront.)

Investment Assumptions

For the Holder, we assume he keeps his money in a one-year CD, which he rolls over into a new CD each year on Jan. 1 until the end of 2022. To calculate how much the Holder would make in interest, we tracked historic one-year CD rates and applied them to our analysis. They ranged from as high as 4.88% in 2001 to 0.14% in 2022.

The Buyer, on the other hand, immediately invests her entire lump sum of $100,000 in an S&P 500 index fund in both scenarios. She rides the more volatile gyrations of the stock market.

Meanwhile, the Dollar-Cost Averager invests a set amount in the same index fund every month through the end of 2022. In our first scenario, he would buy $393.70 worth of shares on a monthly basis beginning in November 2001. In our second scenario, he would invest $602.41 every month starting in March 2009.

2001 Bear Market

In March 2021, the S&P 500 slides into its first bear market since 1987, as The New York Times soberly proclaims in one news article, “The bear is out of hibernation.” The stock market losses come on the heels of the dot-com bubble when a boom in internet companies fueled massive gains on Wall Street.

About eight months later, our first investor remains disenchanted with the stock market. Instead, he puts his $100,000 in one-year CDs. The ultraconservative approach protects his assets from additional market drops but limits his returns compared to the two other investors. By the end of 2022, the Holder’s money has grown 32.9% and is now worth $132,892.

The Buyer decides to bet big on the stock market in November 2001 and invests her full $100,000 in the S&P 500. Despite her account dipping below $100,000 several times, the Buyer’s portfolio eventually recovers and thrives. By the end of 2022, the Buyer has $318,659 – a 318.66% return on her initial investment.

Rather than investing his $100,000 all at once, our third investor gradually allocates his assets every month. Over the next 21-plus years, the Dollar-Cost Averager puts $393.70 in an S&P 500 index fund each month. Using this steady approach, the Dollar-Cost Averager sees his holdings swell to $222,271 by the end of 2022.

2008 Bear Market

The world economy is reeling amid what will be known as the Great Recession. Headlines in the summer of 2008 declare a Wall Street “meltdown.”

Unnerved by the economic downturn, the Holder stashes his money in one-year CDs. But the new low-interest rate environment means the Holder won’t make much in interest on his money. The average interest rate of a one-year CD is just 0.49% from 2009 to 2022.

As a result, the Holder’s money grows by only 7.11% during this time, leaving him with $107,114 by the end of 2022.

The Buyer aggressively invests her $100,000 in the S&P 500 in March 2009. Fortunately, she misses some of the market’s worst months, including September 2008 when the S&P 500 fell nearly 17 points. By the end of 2022, her initial investment balloons to $457,358 – a return of more than 457%.

Lastly, our Dollar-Cost Averager invests roughly $602 per month in an S&P 500 index fund and eventually ends up with $183,981.

The Value of Dollar-Cost Averaging

It’s pretty obvious from our analysis that the Buyer’s strategy is best, right? Not necessarily.

The Buyer’s bet pays off in part because she leaves her money in the market the entire time – for more than 21 years in the first scenario and 13-plus years in the second. In our first scenario, her portfolio is exposed to the financial crisis of 2007-2009 in its entirety, and at one point, is down 30%. But she weathers the duress and fights the urge to pull her money from the market.

Not all investors can do the same. Some simply don’t have the stomach to see their principal investment lose 30% of its value – even if temporarily. For these investors, dollar-cost averaging may be a more suitable strategy. It spreads your risk by lowering the average price of the asset you're investing in. Dollar-cost averaging may reduce the stress that inevitably accompanies market turmoil.

Dollar-cost averaging is also a good alternative to lump sum investing when you consider how difficult it is to time the market – buy low and sell high. The average investor may struggle to find the right time to place their one big bet on a stock or fund. Instead, dollar-cost averaging enables them to bet their poker chips across multiple hands.

Lastly, keep in mind that both the Holder and Dollar-Cost Averager have a liquidity advantage over the Buyer. Sure, neither makes nearly as much money as the Buyer, but they retain more access to their capital. The Holder’s cash is accessible each time his CD is up for renewal, while the Dollar-Cost Averager could pause his monthly investments if another financial need arose.

The Bottom Line

With a bear market unnerving investors and talks of a recession on the horizon, is now the time to pull back from the market, go in all in or find a middle ground? Using historical data, we found that a person who invested a lump sum eight months after two previous bear markets began would have enjoyed huge returns by the end of 2022. However, a dollar-cost averaging approach also would have produced significant gains, outpacing a conservative CD-based investment strategy.

Investing Tips

  • Hire a professional. A financial advisor can help you invest during any market cycle. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Consider your asset allocation. When putting together your portfolio, asset allocation is a key consideration. How much of your assets you invest in stocks vs. bonds will likely vary based on your time horizon, risk tolerance and other factors. Our asset allocation calculator can help you get a sense of how you should spread your money across various asset classes.
  • Keep an eye on fees. Mutual funds and exchange-traded funds (ETFs) charge internal fees called expense ratios. The higher these fees are, the lower your returns could be over time. Keep this in mind as you select investments for your portfolio.

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Photo credit: © Anthony Eddy