The stock market is coming back, but is it really safe to invest right now? Here’s what history says.

The stock market has given many investors quite a scare over the past few weeks because S&P 500 (^GSPC 1.15%) it fell more than 8% between mid-July and early August. The Nasdaq (NASDAQINDEX: ^IXIC) it did even worse, falling about 12% during that time and officially entering a correction.

This decline appears to have been short-lived, however, as the major market indices rebounded as quickly as they fell. At the time of writing, the S&P 500 is up nearly 8% in the past two weeks alone, while the Nasdaq is up about 10% in that time.

Image source: Getty Images.

While many investors may be relieved that this decline hasn’t turned into something worse, others are nervous that this is just a temporary boost before prices fall again. This is a fair concern, especially given how unpredictable the market has been lately.

Sometimes it can be useful to see how the market has performed during previous periods of uncertainty. While past performance doesn’t guarantee future returns, here’s what history says about times like these.

To get an idea of ​​what the market is capable of, let’s look at two scenarios — one in which stock prices continue to rally, and another in which prices fall substantially from the peak.

Scenario one: Stock prices continue to rise

One of the most recent and prominent market comebacks occurred in 2020 during the early stages of the COVID-19 pandemic. The S&P 500 has fallen nearly 34% in less than a month, leading many investors to fear that we are headed for a deep and prolonged recession. However, the market recovered almost immediately before entering a new bull market.

If you had stopped investing when stock prices started to fall, you probably would have missed the early stages of the market recovery. Even if you invested at the apparent worst time (in February 2020, just before the market crash), the S&P 500 has still achieved total returns of nearly 66% since then.

^ SPX data by YCharts

On the other hand, say you sold your investments as soon as prices started to fall and didn’t invest again until January 2021 when the market was rising. It may seem like a safer option, but the S&P 500 has only achieved total returns of about 49% since then.

^ SPX data by YCharts

Timing the market effectively is nearly impossible, so it’s best to simply stay invested no matter what. If prices go up from here, you’ll be along for the full ride.

Scenario Two: Stock prices fall again

While the market could continue its upward momentum, it could also fall again — potentially even crashing into bear market territory. No one knows for sure what will happen. However, a more significant drop is always possible.

That said, if a bear market is on the horizon, it shouldn’t affect your long-term investment strategy. Even if you invest right before a major downturn begins, by holding onto your investments long enough, you’re almost guaranteed to see positive returns eventually.

For example, say you invested in an S&P 500 index fund in January 2000 — just before the dot-com bubble burst, resulting in one of the longest bear markets in history. The index didn’t reach a new high until 2007, just months before the market plunged again during the Great Recession.

However, if you had held on and held on to the investments until today, you would have made total returns of 281% — nearly four times your money. Those first few years might have been tough, but patience pays off when it comes to the market.

^ SPX data by YCharts

Also, like the previous example, waiting to invest until the market has boomed may seem like a safer option. But if you had held off buying until, say, January 2015 (after the S&P 500 had hit a new all-time high and was officially in a new bull market), you would have only made about 172% returns to date. .

^ SPX data by YCharts

The market will always be unpredictable in the short term and trying to buy or sell at the right time can be expensive. While it’s often easier said than done, simply staying invested (regardless of market performance) can protect your portfolio and maximize your long-term gains.