Should I stay invested when the stock market is so volatile?

Significant market downturns can be sharp, rapid, and difficult to endure, but historically, markets have always recovered. Let’s look at the cycle of declines and recoveries and the implications for your portfolio over the long term.


Upturns Have Followed Downturns

Historically, recoveries have tended to last longer and be of greater scale than downturns. This trend helps explain why stocks have historically exhibited relatively strong long-term performance.

The chart below shows the length and severity of downturns (defined as a drop of 10% from the previous market peak), as well as the duration and scale of upturns since 1929.

MARKET DOWNTURNS AND UPTURNS (1929-2011)

As the chart shows:

Historically, market downturns have averaged a duration of 13 months, while the upturns have lasted around 55 months.

The average return during a downturn has been -28.4%. In contrast, the average return during an upturn has been 191.9%.


Stocks Have Bounced Back

In physics, for every reaction there’s an equal and opposite reaction. In the markets, for every downturn there has been an equal or greater upturn.

The chart below shows the performance of the S&P 500 index for 5-year and 10-year periods of negative returns since 1926 and compares them to the returns for the five years that followed each period.

5-YEAR PERIODS OF NEGATIVE S&P 500 INDEX RETURNS (AVERAGE ANNUAL TOTAL RETURNS))

As the chart shows:

The stock market has experienced a negative five-year return only nine times since 1926.

Historically, when there has been a 5-year period of negative returns, it’s been followed by five years with average annual returns of 14.7%, indicating strong recoveries.

Similarly, there were only four poor performing 10-year periods prior to the 2000s and the 5-year periods that followed them had an average annual return of 10.2%.

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