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Corrections, Bear Markets, Etc… Should We Care?

Updated: Sep 27, 2022

There’s the old saying, “All good things must come to an end.” For most people a slowing bull market (in other words a rising stock market) invoke this sentiment when the tide turns, and the stock market head south. Many times entering correction territory (a 10% decline) or even worse, a bear market (20% drop). But is this the truth? Are the good times over?

With the proper timeframe, I would suggest the good times only get better with each significant decline in stock prices. Before we look at that, let’s lean into the history of stock market drops. I came across some great charts (via Schwab) depicting all the corrections & bear markets since 1974. As you can see, we’ve experienced 24 declines of 10%+ through 2020 (As I write this, you can add one more for the latest drop). Of the 24, five entered the bear market territory.

The entire history of the stock market tells us we can expect a correction every 1.6 years. This forty-six-year period was right on par with this average, experiencing a 10%+ decline every two years. You might be saying to yourself, “Great, good to know my portfolio will decline every few years significantly, but it doesn’t make me feel any better.” Hold on a minute…the story gets better.

Just as history tells us to expect the declines, it tells us what to expect following the drops. Again, thanks to Schwab, we have a great chart going back to 1966 that demonstrates the power of bull markets versus bear markets. Without going into too much detail, the clear message here is that the average bull market lasts nearly five times longer than your average bear market and produces gains significantly greater than the declines.

Without a crystal ball to predict market corrections, the evidence is overwhelming that it pays to stay invested to ensure you participate in these huge bull markets. Many people exit the stock market at precisely the wrong time (and then re-enter at less than prime time). Why? Well, primarily emotions, but also a lack of understanding of history. So, let’s end this post with a history lesson (of sorts).

In the past, I’ve written about Time in the stock market is more important than timing the market. The longer you stay invested, the stats are overwhelmingly in your favor to see positive returns. On a rolling basis, history tells us the following:

· For any one year, you have a 75% chance of positive returns,

· For any three years, you have an 84% chance of positive returns,

· For any five years, you have an 88% chance of positive returns,

· For any ten years, you have a 95% chance of positive returns, and lastly

· For any 20 years, you will experience a 100% chance of positive returns.

Essentially, investors have seen positive returns over time in 3 out of 4 years. As I like to say, you can’t make this stuff up.

As long-term investors and while we wade through the current market correction (and future ones), try to remember the historical statistics in this post. Armed with life’s most significant asset… TIME, we should view these market drops for what they are… buying opportunities.

Note: Nothing contained herein in this letter should be considered investment advice, research, or an invitation to buy or sell any securities. Chart(s) source: Schwab.


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