I wrote piece last week called A Short History of Stock Market Pullbacks to show how often stocks are down certain levels over time:
I like to do this when the stock market falls just as a reminder that itâs completely normal.
Hereâs the natural follow-up question I received:
Do you have any charts or data for the âbounce backâ periods following these pullbacks?
Iâve done versions of this in the past but nothing at the various levels of losses in one place.
Letâs do it.
Hereâs what I did:
I have S&P 500 data going back to 1950. I crunched the numbers to see when the S&P 500 was down 10%, 20% and 30% at the end of each month.1 Then I calculated the forward one, three and five year total returns from each of those loss levels to see how you would have fared over the past 76 years or so if you had invested at those breakpoints.
Here are the average returns along with the win rates for each:
Since 1950, if you bought stocks every time the month ended down 10% or worse, on average you were up 15%, 42% and 72% in total one, three and five years later, respectively.
If you bought stocks every time the month ended down 20% or worse, on average you were up 17%, 45% and 74% in total one, three and five years later, respectively.
And if you bought stocks every time the month ended down 30% or worse, on average you were up 21%, 48% and 88% in total one, three and five years later, respectively.
These are just averages but look at the win rates. Sometimes stocks were still down one, three and five years later but it was rare. Most of the time stocks are up when you buy them when theyâre down.
The usual caveat that past performance is not indicative of future performance always applies to studies like this.
The S&P 500 is currently down just shy of 9% from the highs. Maybe this downturn gets way worse or maybe itâs just a run-of-the-mill correction thatâs nothing more than a flesh wound.
Either way, successful long-term investing always involves losses. Most of the time those losses lead to gains in the future.
The hard part, as always, is no one know how big the losses will get in the meantime.
Thatâs risk for you.
If you didnât have the risk you wouldnât get the returns.
Further Reading:
A Short History of Stock Market Pullbacks
1Why only the end of the month? I like using total return data and only have that on a monthly basis. Itâs cleaner.
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