History supports an expectation of investment growth, but that same logic can be difficult to adhere to when financial markets are falling.
The chart below illustrates the historical performance of the U.S. stock market (as represented by the S&P 500 Index), highlighting periods when the market was rising and falling.
Falling markets, called bear markets, are defined as peak-to-trough downturns of 20% or greater from new index highs. These periods are illustrated below in red.
Bull markets are subsequent rises following a bear market bottom through the next new index high, illustrated below in blue.
A History of Market Ups and Downs
By our count, there have been 17 bear markets since 1926—an average of one red period every five years or so. These declines ranged from -21% to -80%, with an average depth of around -30% and an average length of 10 months.
Which bear markets do you remember? Can you spot the -34% bear market related to the COVID-19 Pandemic? With all of the enduring effects of the virus, that bear market lasted just one month. How about the -51% decline related to the Great Recession and Financial Crisis, lasting 13 months?
The human toll during these periods is horrible. Yet, when these periods are viewed together with their counterparts we clearly see that the good times (blue) have been disproportionately longer and stronger than the bad times (red). Consider the advance we've witnessed since one of the modern era's darkest periods, starting at the end of World War II in September 1945, when the U.S. stock market was priced at approximately 16. The same index ended 2021 priced at 4,796.
A permanent advance triumphed despite regular temporary declines. Investors staying the course have been rewarded over time.
Reacting Can Hurt Performance
It can be tempting think of timing these periods, seeking participation during a rising market and shelter during a falling market.
The chart below illustrates the importance of staying invested. Missing out on even a few of the market’s best days each year can have a significant impact on cumulative returns.
As one famous Fidelity fund manager stated,
"Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves". *
If we're honest, we might realize that we have very little control over many of the uncertainties that affect our investments; we can and should have perfect control over how we plan for, and respond to, these same uncertainties.
History supports an expectation of investment growth, especially for those that can accept periods of uncertainty. Historically this is true; emotionally this can be difficult to adhere to, especially as more of your life savings is put at risk and declines drag on.
Fortunately, there exists a prudent set of actions that are time-tested and evidence-based. These actions can guide us in making high-quality financial decisions and are especially valuable each time the world grows darker and emotions rise. Allow us to personalize these decisions for you. It would be our honor to help you navigate your financial future. Please reach out to us anytime, with no obligation, at www.openwindowFS.com/connection.
Chart: A History of Market Ups and Downs
S&P 500 Index total returns in USD, January 1926–December 2021. Using a 20% threshold for downturns.
Bear markets are downturns of 20% or greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high.
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional Fund Advisors chart © 2021. Chart end date is 12/31/2021, the last peak to trough return of 119% represents the return through December 2021. Due to the availability of data, monthly returns are used from January 1926 through December 1989; daily returns are used from January 1990 through the present. Periods in which cumulative return from the peak is –20% or lower and a recovery of 20% from the trough has not yet occurred are considered bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear markets and bull markets, the number of months they lasted, and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.
Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Chart: Reacting Can Hurt Performance
Performance of the S&P 500 Index, 1991–2020.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
In US dollars. For illustrative purposes. Best performance dates represent the end of the period. The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the S&P 500 at the end of the missed best consecutive days. Annualized returns for the missed best consecutive days examples were calculated by substituting actual returns for the missed best consecutive days with zero.
Dimensional Fund Advisors chart © 2021. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.