Stock market declines are the last thing most investors want to experience, but they are an inevitable part of investing. Perhaps a little historical background can help you put stock market declines in perspective.
A look back at stock market history since 1900 shows that declines have varied widely in intensity, length and frequency. In the midst of a decline, it’s been nearly impossible to tell the difference between a slight dip and a more prolonged correction.
About 3 times a year, the Dow Jones has dropped 5% or more, with the average length of the drop being 47 days, and the last occurrence in August of 2015.
About once a year, the Dow Jones has dropped 10% or more, with the average length of the drop being 115 days, and the last occurrence in August of 2015.
About once every two years, the Dow Jones has dropped 15% or more, with the average length of the drop being 215 days, and the last occurrence in October of 2011.
And, about ever three and a half years, the Dow Jones drops 20% or more with the average length of the drop being 341 days, and the last occurrence in March of 2009.
Living with a market decline isn’t easy, but if you understand these 3 key lessons, you’ll be a more intelligent investor:
No one can predict consistently when market declines will happen. It’s easy to look back today and say with hindsight that the stock market was overvalued at a particular time and due for a decline. But no one has been able to accurately predict market declines on a consistent basis. If they do claim that they have consistently and accurately predicted market slides, either run for the country, or look at their overall record, as you’ll find as many misses as hits, but obviously the only ones that are published are the hits. Jeanne Dixon, the fortune teller from the 60’s, claimed fame by predicting John F. Kennedy’s death, but missed on many other predictions that were not made public.
No one can predict how long a decline will last. Since 1982, with few exceptions, market declines have been relatively brief. Earlier market declines had lasted longer.
After the 1929 crash, it took investors 16 years to restore their investments if they invested at the market high. In 2000, it took about 5 years. But after the 1987 crash, it took about 23 months to get back. In 1990, it took about 8 months. (In all cases dividends were assumed to be reinvested).
No one can consistently predict the right time to get in or out of the market. Successful market timing during a decline is extremely difficult because it requires a pair of near-perfect actions: getting out and then getting back in at the right time. A common mistake investors make is to lose patience and sell at or near the bottom of a downturn. But even if you have decent timing and get out early in a decline, you still have to figure out when to get back in.
A bear market is not usually characterized by a straight-line decline in stock prices. Instead, the market’s downward trend is likely to be jagged-showing bursts of stock price increases, known as “sucker’s rallies,” and then declines.
Of course, only time will tell if we are in for a correction, or not. For those interested in “fake news,” President Trump is not causing the downturn in the market any more than his claim for being responsible for its 27% upturn since his inauguration. The fact that the Dow dropped the day of his State of the Union address has to be prefaced by the fact that the Dow closes at 4:00 est and the State of the Union address didn’t even start till sometime after 7:00 est.
The media will report a 660 point one day drop and sensationalize this occurrence, but a 660 point drop on a 25,000 Dow is not the same as a 660 point drop on a 5000 Dow, but it sure raises eyebrows, which is what it’s meant to do.
If you continue to have concerns, don’t hesitate to call your financial advisor before making any changes to your financial plan.
Tim Schumacher represents Strategic Financial Partners in Hays.