Stock Gains Can Add Up After Big Declines

Sudden downturns in the stock market can be unsettling.

But studies show that, historically, stock market returns following sharp declines have - on average - been positive.

Indeed, a broad US stock market index, tracking data since 1926, 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 stock market decline of -10%, stocks rebounded 12.5%.

And a year after -20% and -30% declines, the average cumulative returns were positive too.

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 financial planner who specialises in working with successful professionals age 50+ to help them reduce taxes, invest smarter and retire on their terms.

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