How Long Will it Take for My Account to Recover?
Is it time to provide an analysis to our clients to update them on the status of the financial world? And every week for the past four months, we’ve agreed not to.
There’s nothing to say, we agreed, that they don’t already know. Food and oil prices are rising, the housing market is in a slump, interest rates are no longer falling and the economy is sluggish. Everyone knows all that.
What people don’t know, of course, is what’s going to happen next in the stock market, and we’ve hesitated in providing a market update because the stock market has been so volatile -- rising hundreds of points one day and falling hundreds the next -- that anything we write will be out of date by the time anyone reads it.
Home Economics suggests that financial cycles have been around as long as there have been markets. If this down market is like every other in history, though, the money will turn up again. It's sort of like losing your car keys, only it will take two or three years to find them. But just as we don't sell the car because we can't find the keys, we shouldn't be selling our investments. Downturns don't last forever, and profits usually result for those with enough day ammunition to be able to participate in the next up turn.
After watching the stock market fall 45% in the last 12 months, it’s easy to wonder if you’ll ever get your money back. Fortunately, the adage “what goes up must come down” applies in reverse: Volatility works both ways. Here are several examples, based on the S&P 500:
- The market fell 25% in 1930, 43% in 1931, 8% in 1932 — and then skyrocketed 54% in 1933.
- In 1937, prices fell 35%. The next year, they rose 31%.
- In 1957, the market fell 11%. In 1958, it jumped 43%.
- In 1960, it gained less than 1%, but then rose 27% in 1961.
- In 1973, the stock market fell 15%. It fell another 26% in 1974 — but then rose 37% in 1975, and 24% in 1976.
- After falling 5% in 1981, prices rose for the next 8 years, posting returns that included 21%, 23%, 32%, 18%, 17% and 32%.
- After a one-year loss of 3% in 1990, prices resumed their ascent, rising for another 9 straight years, with returns that included 31%, 37%, 33%, 29% and 21%.
- Most recently, after falling for three years in 2000-2002 (down 12%, 22% and 29%), the market jumped 29%, then 11%, 5%, 16% and 5%.
During every period of extreme volatility -- both high and low -- people insist that “this time” is different from all the other times. It never proves true. Instead, the markets obey a mathematical concept called “reversion to the mean” -- meaning that periods of unusually high or low returns are followed by periods of opposite performance, so that the market’s long-term performance returns (reverts) to long-term average (mean).
Like I said, volatility works both ways — and history shows that the number of years where the market gains far outpaces the number of years where prices fall, and the gains also tend to be bigger than the declines.
Of course, past performance does not guarantee future results. But, if the recent declines have been worrying you, you might want to keep this information in mind.