The history of stock market falls and recoveries shows the advantage of sitting tight.

Remember when Brexit was our biggest worry? Last month’s Budget already seems a distant memory. The first quarter of the new decade was certainly one investors would like to forget. The panic caused by the coronavirus pandemic saw US equities lose 23% to suffer their worst quarter since 1987. UK equities fell further, also recording their poorest three-month period for over 30 years.

Of course, the potential for market shocks like this one is the risk investors take for the higher long-term returns possible from the stock market. Analysis by Schroders shows that, in the last 148 years, the US market has fallen 25% or more on 11 occasions. But how long did it take to recover those losses? What does history show us about whether the right decision would have been to sit tight or dash to cash?

Source: Financial Express. Data shown in both tables is for the S&P 500 Total Return Index. Past performance is not a guide to future returns.

In seven of the eleven occasions, investors who held their nerve would have got back to their pre-crash value in two years or less. In contrast, investors who had switched to cash after the first 25% of losses in 2001 (dotcom crash) and 2008 (global financial crisis) would still be out of pocket.At first glance, the recovery periods for those who stayed invested in the market might seem quite long. But compare them to the time it would have taken to recoup your losses if you’d shifted your money into cash after markets had fallen 25%.

Amid the market turmoil, UK interest rates have also dropped to their lowest level in history, and look set to remain near record lows for many years to come. It means that investors who have jumped into cash have effectively given up any hope of recovering the money lost during this correction.

It can be difficult to sit tight – and there is a real possibility that the recent market lows will be tested again as the economic damage caused by COVID-19 becomes clearer – but investors who do are likely to end up better off in the long run.

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