Recovering From Stock Declines

“Note that…‘volatility’ is often a misnomer. Strategists and the media often warn ‘there is volatility ahead.’ What they really mean is ‘there may be price declines ahead.’ No one worries about, or minds experiencing, volatility to the upside.” 

—Howard Marks, “What Really Matters,” November 22, 2022

This week’s note includes a video, and the video includes PUPPIES!  Our firm helps support Jenni’s Rescue Ranch and my wife does a lot of work with the dogs, so my house is often filled with puppies.  If you are interested in fostering or adopting, you should check them out.

If you are still here for the financial stuff, the video covers the topics of volatility, the frequency of market declines, and the time it has historically taken for equities to recover.  Granted, nothing about the past proves anything about the future, but a rundown of the historical record seems like a good starting point. 

For those that prefer to read, these are the slides discussed: 

First up, the annual return of the S&P 500 from 1929 – 2023. 

(Source: WSJ)

Second, (and more importantly) the frequency with which you would have lost money since 1929 based on your holding period.  In any given month, the odds of the S&P 500 losing money are nearly 40%.  However, over longer periods of at least five years, the odds of loss diminish tremendously.  As Jeremy Segal notes in the 6th edition of his book, Stocks for the Long Run:  

“It took just over 15 years to recover the money invested at the 1929 peak, following a crash far worse than Smith had ever examined. And since World War II, the recovery period for stocks has been even better. Even including the recent financial crisis, which saw the worst bear market since the 1930s, the longest it has ever taken an investor to recover an original investment in the stock market (including reinvested dividends) was the five-year, eight-month period from August 2000 through April 2006.” 

Significant stock market declines have happened and will happen again. If you are not prepared to hold an equity position for at least 5 years, we do not suggest owning that equity position at all.   

Finally, a chart summarizing the 16 bear markets (defined here as any time when the market has dropped from peak to trough by at least 19%) that have occurred since 1950.