Stock market corrections can cause a lot of anxiety, and subsequently some pretty poor, emotionally charged, spur of the moment investing decisions.
This performance chasing is what often leads to inferior results. Investors are caught by surprise and change tact.
But drawdowns in the stock market shouldn’t surprise. They are extremely common.
This can be seen no better than in the example of the S & P 500 (United States 500 company index) market since 1980.
Every single year at some point during that year there has been a market pullback. The average sized pullback being negative 13%. Note, this isn’t the annual returns for that year. It just means that the average of the total pullbacks (index decreases) for that year was 13%.
In over half (21 out of 41) of those years, the market experienced a double digit drop at some point in time.
30%+ drawdowns occurred on average every 10 years.
These numbers indicate that the value of your stock investments decrease frequently and in significant amounts at times. This is a known.
I can understand why large drawdowns can surprise though. The last significant annual decline in the S & P 500 was all the way back in 2005. Any drawdown since then has most often resulted in a very quick bounceback with a positive return for the year.
So when you lose 20% plus on your investments it shouldn’t really come as a surprise. That is just the price we pay (volatility) for the hope of long term returns.
The more you can understand this, the more you can leave your investments alone. The results of which were clearly seen when many people switched their investments to conservative funds during the 2020 Covid drawdown. This will result in millions of dollars lost by investors by cashing in the losses and coming back in at a higher price or not at all (which is an even higher price than the higher price!).
This is where you can benefit from having a solid investment plan that gives you the confidence you are invested accordingly regardless of the economic conditions.
If you need an investment plan or recommendations , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here