“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
– Sun Tzu, The Art of War
Media has been pushing the fear story for as long as I have been investing. Everyone fears of a crash, and negative returns and news are emphasized over positive developments. It is human nature to pay attention to Armageddon, which may never come.
However, if one does not invest, his or her purchasing power will be taken away by inflation. On the other hand, if one invested into a stock market (i.e. SP500) for the last 100 years, the annualized return is approx 10% per year.
Let’s check the facts:
1. How often does the stock market go down?
- Based on 150 years of data stock market has gone up 57% on a monthly basis and produced a negative monthly return 43% of the time
2. What are the biggest stock market declines and how often do they happen?
- In the past 107 years general US stock market index experienced 9 major drawdowns (i.e. decline of 20% or more)
- It took 31 months to reach absolute bottom, on average
- It took 89 months to get to the previous peak
- The last major drawdown occurred in 2020 (i.e. due to COVID 19 pandemic) and lasted only 6 months. This was one of the shortest bear markets on record, and it took only 3 months to reach absolute bottom.
| Drawdown Value | Drawdown Start | Full Recovery | Months to Recover | Months to Bottom |
|---|---|---|---|---|
| -85% | September 1929 | August 1954 | 299 | 33 |
| -51% | October 2007 | February 2013 | 64 | 18 |
| -47% | June 1872 | January 1880 | 91 | 61 |
| -44% | August 2000 | April 2007 | 80 | 30 |
| -43% | January 1973 | June 1980 | 89 | 23 |
| -42% | June 1881 | November 1900 | 228 | 182 |
| -38% | September 1906 | July 1909 | 34 | 14 |
| -37% | December 1909 | December 1924 | 180 | 140 |
| -29% | September 1902 | February 1905 | 29 | 13 |
| -29% | December 1968 | February 1972 | 38 | 17 |
| -27% | August 1987 | June 1989 | 22 | 4 |
| -22% | December 1961 | August 1963 | 20 | 7 |
| -20% | December 2019 | June 2020 | 6 | 3 |
| -19% | November 1980 | October 1982 | 23 | 19 |
| -17% | January 1966 | July 1967 | 18 | 8 |
| -17% | July 1956 | August 1958 | 25 | 16 |
3. Stock Market Returns:
- Stock Market may return 0% for long periods of time. However, it has returned approximately 10% over longer-term time horizons
- Since 1988, SP500 returned approximately 10%, on average, assuming the re-investment or dividends
- Stock market has experienced long periods of 0% returns as well. For example, SP 500 returned close to zero between 1997 and 2009. That is 14 years of no returns (based on price index)
- Similar zero % price returns occurred between 1966-1975 and between 1931-1950
Conclusions:
- it is completely normal for stock market to go down
- stock market produced a 10% return, on average, over longer term time periods
- Stock market is a long-term game, however, even some longer time periods produced a return that is close to 0%. This may be psychologically hard for an investor.
- Diversified portfolio: If an investor is looking for a way to help with his or her retirement, investing in a stock market may not be sufficient. An investment portfolio must be diversified among different asset classes (stocks, commodities, real estate, alternative investments, and fixed income) to produce a consistent and more stable return.
Full Data for this analysis can be download here
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