Last week I wrote a song called A Brief History of Stock Market Retracements To show how often stocks fall to certain levels over time:
I like to do this as a reminder that when the stock market is down, it’s completely normal.
Here’s the natural follow-up question I get:
Do you have any charts or data on the “return” periods that followed these pullbacks?
I’ve done versions of this in the past but nothing with varying levels of loss in one place.
Let’s do it.
Here’s what I did:
I have S&P 500 data going back to 1950. I crunched the numbers to see that the S&P 500 was down 10%, 20%, and 30% at the end of each month.1 I then calculated the forward one-, three- and five-year total returns from each of these loss levels to see how you would have fared over the last 76 years if you had invested at these breakout points.
Here are the average returns along with win odds for each:
Since 1950, if you bought stocks every time the month finished 10% or worse, you averaged 15%, 42%, and 72% total gains after one, three, and five years, respectively.
If you bought stocks every time the month ended 20% or worse, you’d be up an average of 17%, 45%, and 74% overall after one, three, and five years, respectively.
If you bought stocks every time the month ended 30% or worse, you’d be up an average of 21%, 48%, and 88% overall after one, three, and five years, respectively.
These are just averages, but look at the win rates. Sometimes stocks were still down one, three and five years later, but that was rare. Most of the time when you buy stocks when they’re down, they go up.
The usual caveat that past performance is not indicative of future performance always applies to such studies.
The S&P 500 is currently down just under 9% from its highs. Maybe this regression is getting worse, or maybe it’s nothing more than a casual correction. a flesh wound.
In both cases, successful long-term investments always involve losses. Often these losses lead to gains in the future.
The difficult part, as always, is that no one knows how big the losses will be in the meantime.
This is your risk.
If you didn’t take risks, you wouldn’t get a return.
Further Reading:
A Brief History of Stock Market Retracements
1Why only end of month? I like to use total return data and only use it on a monthly basis. It’s cleaner.
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