Decades of academic evidence supports our view that patience is a virtue in building wealth over a lifetime of investing. As Vanguard founder John Bogle liked to put it: "Time is your friend; impulse is your enemy."

Such a simple yet sage bit of wisdom about investing can take added importance during times of heightened market stress. One of the most extreme of these stressful economic periods, of course, is a recession. While it's commonly measured as two consecutive quarters of negative gross domestic product growth, the Bureau of Economic Analysis (BEA) points out this isn't entirely accurate.

An official designation of a recession "is the province of a committee of experts at the National Bureau of Economic Research (NBER)," notes the BEA's glossary of economic terms. The NBER is a private non-profit research organization that studies a broad range of data including levels of employment, inflation and industrial production. According to the BEA, this means that "the identification of a recession with two consecutive quarters of negative GDP growth does not always hold." ¹ 

So what does a century of such economic slowdowns teach us about investing? Working with researchers at Dimensional Fund Advisors, we've compiled a series of graphics to examine how stocks have behaved during U.S. recessions.

The chart below illustrates the hypothetical growth of $100 invested in securities as represented in the Fama/French Total U.S. Market Index from 1926. Notice that certain periods are shaded in dark green. These areas designate specific timeframes of recessions, per official NBER analysis. ²

The clear take away from such a study: As a wealth of academic research from Nobel laureates such as Eugene Fama and Harry Markowitz reveals, current market prices reflect the collective expectations of investors — even when economic growth slows. 

Recessions: The 'Big Picture' for Investors

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Although a definitive recession determination typically comes after-the-fact, it isn't unusual for stock traders to call recessions in a pre-emptive manner. Instead of listening to such noise, our wealth advisors urge investors to remain disciplined in the face of increased market volatility.

Along those lines, we recommend that clients stick to a strategic and holistic financial plan — something that's offered by IFA on a complimentary basis.

Below is a series of graphics sourced from Dimensional Fund Advisors LP, providing more detailed information about each period identified by the NBER as a recession. Feel free to scroll through such a historical breakdown, which is presented in chronological order. 

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Footnotes:

1.) U.S. Bureau of Economic Analysis, "Recession," glossary of terms as of December 2022.

2.) Dimensional Fund Advisors, "Market Returns Through a Century of Recesssions," June 10, 2022.

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This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.

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The graphics on this page were republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP. 

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Chart Series Disclosures:

Data presented in the Growth of Wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Results shown during periods prior to each index's index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

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