A Guide to Stock Market Recoveries: After Large Declines, Markets Have Recovered Relatively Quickly
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A Guide to Stock Market Recoveries: After Large Declines, Markets Have Recovered Relatively Quickly
During stock market declines, investors often worry that things will get worse before they get better. This is a natural feeling when headlines are gloomy, markets are down sharply, and the world feels uncertain. However, for long term investors, whose objective is to purchase a broadly diversified mix of growing businesses -- and to do so at lower prices -- stock market declines may provide opportunity.
Savvy investors use market declines to their benefit. They take advantage of shorter term market volatility and add to their well diversified stock portfolio — buying at lower prices while other investors may be panic selling their investments. Warren Buffett is quick to remind investors that, "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price."
Perhaps even more encouraging, after large declines, stocks have often recovered sharply. We tracked the 18 biggest market declines since the Great Depression, and in each case the benchmark S&P 500 Stock Index was higher five years later. Annual returns over those five-year periods averaged more than 18%. Returns have often been strongest after the sharpest declines, bouncing back quickly from market bottoms.
Navigating Market Downturns: Unearthing the Power of Quick Recoveries
During periods of significant market declines, investing can sometimes feel overwhelming. However, data provided by Capital Group offers promising insights to guide investors through these turbulent periods. One of the key takeaways is that, historically, markets have often recovered relatively quickly after substantial declines.
History Speaks: Quick Recoveries are Common
Interestingly, returns have often been strongest immediately after the sharpest declines. In the first year following the five biggest bear markets since 1929, the average return was an astonishing 70.9%. This data underscores the importance of avoiding panic-driven decisions and staying committed to one's long-term investment strategy, especially during times of heightened market volatility.
Lessons from the Past: Bear Markets and Strong Recoveries
Detailed analyses of the five most significant stock market declines since 1929 also indicate the trend of strong recoveries. Each severe decline was followed by impressive returns over the subsequent five years, with an average annualized five-year return of 23.1%. For context, a one time $10,000 investment that earned 23.1% for 5 years would grow to $28,267 (nearly 3x your initial investment).
Key Takeaways for Investors
Stay Invested: One of the most crucial takeaways for investors is the importance of staying invested, especially during times of significant market downturns. Pulling out of the market during a decline locks in losses and could mean missing out on the swift and substantial recoveries that are likely to follow.
Keep Calm and Carry On: Understand that market volatility is part and parcel of investing. The steepest declines have historically been followed by the strongest recoveries.
Patience Rewards: It's important to keep a long-term perspective and remain patient. Historical data shows that just five years after significant market downturns, returns have often been substantial.
Conclusion
Despite the potential for variations, the historical track record of market recoveries offers valuable lessons for investors. It emphasizes the importance of staying invested and resisting the temptation to abandon stocks during periods of market turbulence. By maintaining a long-term perspective and avoiding knee-jerk reactions to short-term market movements, investors can position themselves to benefit from the potential rebound and growth opportunities offered by market recoveries.
In conclusion, history has shown that markets have recovered relatively quickly and delivered strong returns following significant downturns. While past performance is not indicative of future results, understanding these historical patterns can provide investors with confidence and conviction to stay invested and weather the inevitable market fluctuations with a focus on long-term goals.
Ultimately, the trade off for achieving long term stock returns has always meant enduring periods of stock market declines. Back during the financial crisis in 2008, Warren Buffett presciently shared that the meaningful stock market decline during that time provided buyers with longer term opportunities because stock prices ultimately go up over time based on the growth of company earnings (profits). According to Buffett, "Businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, ten and twenty years from now." Consequently, we encourage you to stay calm during market declines, while remaining focused on your personal financial plan towards reaching your goals.
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Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.