What investors lose sight of is that equity market returns over the past thirty-five calendar years have been mostly positive, despite significant market declines in each calendar year. The chart below demonstrates this point by examining market activity from 1980 to 2015. The lowest point of the stock market during each calendar year is shown by the red dots, compared to the market’s return for the full year, as shown by the green bar.
CALENDAR YEAR RETURNS AND INTRA-YEAR DRAWDOWNS OF S&P 500 PRICE INDEX (1980 – 2015)
Source: Dow Jones Indices LLC, December 2015
The average intra-year pullback in the Standard and Poor’s 500 Index (“S&P 500”) since 1980 has been roughly 14%, a little less since 2009. Despite the 14% intra-year decline, the S&P 500 has closed positive in 27 out of 35 years, 77% of the years in that period. In another study, when examining market peaks and bottoms over a longer time horizon (January 1928 through September 2015, we find that after declines of up to 20% from previous peaks, a new market high is reached within less than 12 months a remarkable 99% of the time (FN).
The chart provides a visual perspective of “normal” yearly market volatility with equity investing. Yet for the typical investor, emotional behavior can often lead to panic selling during market declines. Inevitably, many investors sold during the declines and missed out on the upside as the market recovered. Unfortunately stock market returns rarely come evenly. Setting expectations, understanding behavior and establishing plans about how to react to inevitable market movements can help investors keep their hands off the panic button and improve their long-term investment results.
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