It is often said that the market is driven by two things – fear and greed. This past week, as the news has been filled with panic inducing headlines and dizzying statistics, fear has clearly been in the driver’s seat. Reports of the coronavirus spreading outside of China have turned a Chinese epidemic into a global pandemic. The headline risks have had a contagion effect on the stock market, infecting markets and spurring a sharp decline in the S&P 500 of near nearly 11.5% in a single week. While the true fallout of corona remains to be seen, panicked sell offs are nothing new to stock market participants. At times like these, the best thing you can do is remind yourself that you have been here before. As Mark Twain famously said, “History doesn't repeat itself but it often rhymes.”
The chart below is a personal favorite of mine and should serve as a striking reminder of what you sign up for when you invest in the stock market. The graphic displays the returns in the US stock market every year since 1980. The grey bars represent the return for each given year and the red dot beneath the bars represents the biggest single decline that year. Since 1980, there has been on average, a decline of almost 14% every year. Despite market declines of roughly 14% occurring every year, 75% of the time stocks have ended the year positively. In the past 40 years, only 10 years have produced a negative annual return.
Looking back over the past 40 years, a decline of 11.5% is not unique, with most years experiencing a similar decline. What was unique about last week was the speed of the decline, which was the fastest in market history. Volatility can be incredibly uncomfortable for many investors. The chart below from Deutsche Bank illustrates the fastest 10% declines in stock market history. On the left is August 1981, which took almost 200 days to decline 10%. The far right red bar represents last week’s decline February 2020, which occurred over a 5-day period.
We don’t have to look back far in history to find an example of why you should stay invested during even the most troubling of times. In the fourth quarter of 2018, the market experienced a decline of 20% over the span of 3 months – nearly double the decline of what we have experienced so far. What followed in 2019 was one of the strongest, and swiftest, returns in stock market history. If you had sold in a panic, it is likely that you missed most of the return, all while locking in your loss. This is why investing can be so difficult for so many.
Thank you for your trust,
Aaron Brickley, CFP, CPWA
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