How can my portfolio recover quickly from a market decline?

A market decline can be abrupt and unsettling, and it’s natural to feel wary about re-investing until you see clear signs of a recovery. But if you hesitate for very long, you could miss a bounce.

Let’s look at how long it can take a portfolio to recover from a significant decline and what you can do to potentially help yours bounce back faster.

 


 

Higher Returns Can Speed Recovery

How long it takes your portfolio to recover after a decline is directly related to the returns you can achieve. Recovering from a significant decline could take longer than you might anticipate if your portfolio is earning lower returns typical of fixed income or cash investments.

The chart below shows the recovery times for a hypothetical $500,000 portfolio using a range of different loss amounts and annual return rates.

Front of Chart

Accelerate Recovery Chart Front

As the chart shows:

After your portfolio declines, it’s natural to think about how to get back to where you started. If your portfolio loses 40% of its value, you’ll need a gain of 67% to break even, which is not likely to happen in one year.

If you achieved a return of about 3% per year in a cash investment, for example, it would take 17 years to make back what you lost.

On the other hand, if you have higher risk tolerance and invest in stocks or balanced portfolios, you might recover your losses in closer to five years.

Similar calculations are easily made for a range of portfolio declines and annual return rates, which you can see in this table.


Market Recoveries Have Been Rapid

Your ability to achieve the higher returns you need to recover quickly from a downturn may hinge to a significant extent on how soon you invest in a recovering market. Markets have tended to bounce back rapidly.

The chart below shows average cumulative returns of the S&P 500 Index broken into six-month periods following bear markets (defined as declines of 10% or more).

Back of Chart

Accelerate Recover Chart Back

As the chart shows:

Just as market declines can be sharp, recoveries tend to happen fast. The average return over the 18 months after a market bottom is 50.4%.

However, those gains aren’t spread equally over the 18 months. In the 15 recoveries shown in the chart, markets went up by 24.3% on average over the first six months and by 40.3% over the first year. If you miss those key first quarters, you might miss a large portion of the market recovery.

Investing involves risk, including possible loss of principal.

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