Three lessons from market declines
The current market downturn isn’t easy to weather, but past market declines can provide meaningful lessons.
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Lesson 1
Keep a long-term perspective.
We can’t predict what will happen. But after earlier recessions, markets recovered over the long term. Learn more
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Lesson 2
Stay invested.
If your investment goals haven’t changed, it’s likely that your strategy shouldn’t change. Learn more
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Lesson 3
No one can predict market declines or rallies.
Trying to jump in — or jump out — at the right time is risky. Learn more
Lesson 1: Keep a long-term perspective.
We don’t know if the current recession will be like earlier instances or how long it will last, but we do know that over longer, more meaningful periods, the markets have recovered. The table below shows how the Standard & Poor’s 500 Composite Index bounced back after the past 10 recessions:
S&P 500 returns after recession lows
| Date of S&P 500 low during recession* | S&P 500 returns | ||
|---|---|---|---|
| 1 year later (total returns) |
5 years later (average annual total returns) |
10 years later (average annual total returns) |
|
| June 13, 1949 | 53% | 24% | 22% |
| September 14, 1953 | 45% | 22% | 17% |
| October 22, 1957 | 36% | 11% | 13% |
| October 25, 1960 | 35% | 15% | 8% |
| May 26, 1970 | 49% | 9% | 9% |
| October 3, 1974 | 44% | 17% | 16% |
| March 27, 1980 | 44% | 19% | 18% |
| August 12, 1982 | 66% | 32% | 20% |
| October 11, 1990 | 34% | 18% | 19% |
| September 21, 2001 | -11% | 8% | N/A |
| Mean | 40% | 18% | 16% |
| Median | 44% | 17% | 17% |
These results assume that dividends were reinvested in the S&P 500, an unmanaged index.
Lesson 2: Stay invested.
It’s not easy to hold steady in a downturn, especially when it seems like the market decline will continue. But if your investment goals haven’t changed, it’s likely that your strategy shouldn’t change.
Take a look at the charts below that show a hypothetical $1,000 investment from two perspectives.
The first one shows the monthly total returns of the S&P 500 over a 30-year period. By only showing the ups and downs month to month, the chart emphasizes the erratic nature of market activity.
Monthly total returns of a hypothetical $1,000 investment (12/31/79 - 12/31/09)
However, when you take the long view and look at the annual growth of the same 30-year $1,000 investment, an upward trend is revealed.
Annual growth of a hypothetical $1,000 investment (12/31/79 - 12/31/09)
Returns for the S&P 500, an unmanaged index, assume all dividends are reinvested but do not reflect sales charges, commissions or expenses. Figures shown are past results and are not predictive of results in future periods.
Lesson 3: No one can predict market declines or rallies.
It’s easy with hindsight to say that the market was overvalued and due for a correction. But no one has been able to predict market declines or rallies consistently. That means that trying to jump in — or jump out — at the right time is risky.
Consider what happened in January 1973. A New York Times poll of eight market authorities predicted that the market would "move somewhat higher" in the future. Instead, the Dow industrials proceeded to decline 45% over the next 23 months. Then, although almost no one predicted it, the Dow rose 53% from its low in December 1974 to its high in July 1975. If you had tried to move in and out of the market based on predictions, you probably would have missed the best times to actually do so.
Market declines can be painful, but it’s important to keep your perspective and stay focused on your long-term goals.
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