Stock Gains Can Add Up After Big Declines
Sudden downturns in the stock market can be unsettling.
But studies show that, historically, US equity returns following sharp declines have, on average, been positive.
A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines.
Cumulative returns show this trend to striking effect, as seen in the graph below:
On average, just one year after a market decline of 10%, stocks rebounded 12.5%.
And a year after 20% and 30% declines, the cumulative returns topped 20%.
Over three years, stocks bounced back more than 30% from declines of 10% and 20%, although - while still positive - returns were not as impressive after 30% declines. But five years after market declines of 10%, 20%, and 30%, the average cumulative returns all top 50%.
A look at the data makes a case for sticking with your financial plan. Handsome rebounds after steep declines can help put investors in position to capture the long-term benefits that global stock markets can offer.
Amyr Rocha Lima, CFP® is a partner at Holland Hahn & Wills LLP, a financial planning practice based in Kingston upon Thames. He specialises in working with successful professionals age 50+ helping them reduce taxes, invest smarter and retire on their terms.
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