COVID-19 Alert: Blue Water Capital Management, LLC is primarily working from home offices and using remote meetings, but can meet in-person as well.
If you have concerns about the markets, or would like to have us look over your investments, please feel free to contact us.

Specializing in retirement planning and personalized investment management.

Three Slides About Market Loss & Recovery

The Blue Water Team

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.