NEW YORK, NEW YORK – AUGUST 5: Traders work on the floor of the New York Stock Exchange (NYSE) on August 5, 2024 in New York City… (+). Global stocks plunged amid fears of economic recession in the US and Japan, and the Dow Jones Industrial Average fell more than 1,000 points in morning trading. (Photo by Spencer Pratt/Getty Images)
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The S&P 500 rose 24.3% in 2023 and added another 20.8% through the first three quarters of 2024. Despite the huge gains in U.S. stocks over the past two years, and more broadly the past 15 years, these are investors who continue to miss out while waiting for the other shoe to drop.
Well, let’s fall.
Despite certain calamities, such as the Great Recession and the tech bubble of the early 2000s, the S&P 500 has turned into a long-term compounding machine.
The index’s continued record highs this year serve as a reminder that a period of panic and underperformance was an opportunity for long-term investors. In other words, past declines have only laid a greater foundation for an eventual rise.
Stock market decline is scary
When you endure pullbacks, it’s easy to feel like, “This is it!” This is the biggest one! ” Perhaps it’s because we’ve been scarred by the brutal bear market of the first decade of the 2000s, or more recently, the volatility and declines associated with the coronavirus and high inflation. Maybe it’s human psychology.
Unfortunately, financial decisions are often emotional and there is an extreme fear of losing your hard-earned money. This is especially true when you don’t know why a stock is falling and you don’t know how far it will fall.
The reality is that withdrawal is only part of the journey.
S&P 500 annual returns since 1942
Etro
Going back to 1974, the S&P 500 index averaged more than 5% declines about three times a year. In other words, it’s not uncommon to experience mild recoil every 3-4 months. Additionally, the average intra-year revision from top to bottom is approximately 14%.
Investor sentiment tends to be at its highest when the market is near its bottom. Unfortunately, we make fewer financial decisions when our emotions are raw.
That’s why we change the way we think.
Pullback is a feature, not a bug
Imagine for a moment that you are a consumer who goes to the grocery store and buys almost the same items every week. One day, the store decided to offer a discount of 5% to 10%. Shoppers will be delighted!
So why don’t we feel that way about stocks, especially when investors are buying on a monthly or biweekly basis, with timelines measured in decades rather than days? Or?
By now, you’ve probably connected the dots: A decline in stock prices equals a decline in stock prices. With stock prices at record highs, this presents a good opportunity for long-term investors. That’s true, but at this point it’s just an anecdote. Let’s take a closer look at the numbers to prove it.
Looking back at market performance over the past 82 years (as this dataset started in 2022 and has been updated since then), the S&P 500 has a remarkable track record. Since 1942, the index has produced a 79% win rate when measured on an annual basis.
Number of up and down years since 1942
Etro
Looking at the S&P 500’s annual total return (that is, including dividends), the average return in up years is 19.8%, while the average decline in down years is only 12.1%.
So not only has the S&P 500 index risen on average four out of five years since 1942, but the up years are typically stronger than the down years.
If the data above seems carefully selected, that is not the case. Similar observations hold true over different time periods. Take a look at the annual winning percentage for the following metrics:
Past 20 years: 81% Past 30 years: 77% Past 40 years: 80.5% Past 50 years: 78.4%
The S&P 500 Index has only had one consecutive decline (1973 and 1974) and once in three consecutive years (2000, 2001, 2002). Conversely, the index had 12 periods of three or more consecutive increases during the year.
In fact, there was one year with 8 consecutive increases, and 2 consecutive annual increases with 9 consecutive increases.
conclusion
Unfortunately, strong performance does not guarantee the same in the future. But for investors who are in this situation for the long term, it’s worth accepting the decline and building up through the bear market while holding out for brighter days ahead.
This is not a theory based on hope, but an argument solidified in data, and that data shows that dips are proving to be buying opportunities or opportunities to panic. Masu.
Bull markets tend to last long and hard, while bear markets are usually quick, deep, short-lived, and certainly painful. Lower prices may catch active investors by surprise, but they are a gift to long-term investors who continually add to their stock positions.
