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The Up Side of Down: Stock Market Declines & Annual Returns
How was your last vacation? You might remember the beach, a walking tour of the city, or just being with family members. Good answer! But what about the plane that was delayed, the sandals you forgot to pack, or the wrong turn you took near the hotel entrance. If someone asks you about your trip and you begin describing all these difficulties, chances are you won’t be getting asked again.
Unfortunately, as investors this is often exactly how we think. With investing, we are more likely to remember the setbacks than the joy of achieving our gains. So you may not be surprised – or your market anxieties may be confirmed – to learn that market declines do occur each and every year, as seen in the table below. But they also provide us with a historical perspective about what investors can do to be successful.
The table below shows the intra-year max decline of the S&P 500 Index for each of the last 35 years. The red dots show the largest peak-to-trough drop during the year, and the black bars show the year’s eventual total return. The good news? Despite average intra-year drops of 14.2%, annual returns have been positive in 27 of 35 years.
Notice that in several years of the intra-year decline was steep, but annual returns were still positive. For example, 1980 saw an intra-year drop of 17%, 1998 saw an intra-year drop of 19%, and 2003 saw an intra-year drop of 14% — and yet all three years saw positive returns. The takeaway: don’t panic in a bad year…it’s likely time to buy ahead of a rebound that is just around the corner.
Market fluctuations are a normal part of stock market investing, and past performance of the S&P 500 isn’t guaranteed in the future. If you understand that fluctuations are to be expected, you will be better prepared to stick to your investment plan.
Here are five ways to make market fluctuations work for you rather than against you:
- Don’t sell during a market downturn – a rebound could be just around the corner.
- Commit to rebalancing and adding to your investments stocks during market corrections.
- Keep a diversified portfolio that will not fall as much during market downturns, to keep you from selling in a panic.
- Learn to expect and embrace market volatility.
- Take a long-term perspective – It may not be easy, but think like a vacationer: those able to focus on long term gains will have a much more satisfying story to tell.