Investing During Major Depressions, Recessions, and Crashes
Abstract
This paper explores returns to investing during five of the most famous financial crises in stock market history: the Great Depression, the 1970s Recession, the 1987 Black Monday Crash, the bursting of the Tech Bubble, and the Great Recession. The analysis utilizes both CRSP value- and equal-weighted indexes, the latter providing more exposure to small stocks. The results demonstrate the importance of continuing to invest throughout the crisis event and after. Although the negative returns during the crisis may unnerve investors, recovery returns tend to be abnormally high rewarding those staying in the stock market. The recovery is quicker and stronger for the equal-weighted index, which suggests that during times of crisis, investors may be able to enhance their returns by incorporating small stocks into their portfolio.