Three Slides About Market Loss & Recovery
Dimensional Fund Advisors (DFA) provides a unique look at loss and recovery in the stocks market.
In slide 1, DFA shows us that it’s a bumpy road to get to the stock market’s long-term average return. It’s amazing to think that although the stock market has averaged 10%/year since 1926, it has actually only returned between 8% - 12% six out of 94 years. The stock market has only been close to its average return 6.5% of the time. The slide shows us that it takes a lot of larger ups and downs to get to that average return. Patience and a long-term perspective will help you realize what the stock market has to offer.
Slide 2 asks if downturns lead to down years, and it is one of our favorites. DFA provides a very interesting chart that shows the largest declines in every year over the past 20 years and whether there was a positive or negative return that year. For years where there were intra-year declines of 10% or more, 5 years posted negative calendar returns, but 8 years still posted positive calendar returns – including during the financial crisis in 2019. In mid-March, the market was down 27% and things looked bleak. However, the market rallied the rest of the year and ended up 28% by the end of the year. The take-away is that stretches of negative returns throughout the year do not necessarily lead to negative returns for the year.
Slide 3 is an old standby – with a twist. There are a lot of charts that discuss sticking through market declines, but DFA’s slide about historical stock gains after large market losses takes it a step further. DFA breaks out the stock market declines into 3 levels of severity (10% drop, 20% drop and 30% drop), and then shows the average cumulative returns over the next 1-year, 3-year, and 5-year periods for each decline. On average, US stock market returns following sharp downturns have been positive. Whether it was a 10%, 20% or 30% drop, the five-year average cumulative return for each was over 50%. Just a nice reminder to not give up on stocks when the markets get rough.
These slides highlight the importance of the "N" (Nerves) in our ACTION philosophy.