It may seem that the U.S. stock market has been the place to invest your savings over the past few years. The Standard & Poor’s 500 returned 32% in 2019, 18% in 2020 and is currently up over 18% so far this year. That’s well above its 50-year average annual return of slightly over 10%.
During periods like this, it’s easy to become complacent and forget that the stock market also experiences downturns. And they occur with much greater frequency than you might imagine.
A chart from Calamos Investments (available to view at tinyurl.com/ab9htk8c) shows yearly S&P 500 performance over the past 40 years. The dark-blue bar indicates the end-of-year return, while the green-outlined bar shows the biggest decline within each year. (Don’t get confused by the mislabeling on the x-axis).
The bad news: Over the past 40 years, the S&P 500 has experienced a decline of at least 3% every single year. In fact, during more than half of those years, the maximum intra-year pullback was greater than 10%. And on average it was 13%. Those were not insignificant hits to your portfolio.
The good news: Despite all those market declines, the S&P 500 still managed to produce year-end gains over 82% of the time. Note also that market returns following each of the three years with the greatest intra-year declines were all very strong.
So, what should we take away from all this?
Stock market investing is volatile and losses occur with regularity. Despite that, it remains one of the most consistent ways of growing your savings for the longer term – as long as you don’t overreact to the downturns in the shorter term.
Los Altos resident Artie Green is a Certified Financial Planner and founder of Cognizant Wealth Advisors. For more information, visit cognizantwealth.com.