Recently, the US stock market’s broad index S&P 500 fell by nearly 9 percent from its latest peak on July 16th to the closing after Monday’s market turmoil. Stockholm followed closely, with its index losing almost as much.
The old saying that the stock market takes the stairs up and the elevator down has once again proven to be true, as the first half of the year has been characterized by rising markets and unusually few major setbacks. Looking back at stock market history, it was only a matter of time before it was time for a new downward elevator ride.
It is normal for the market to stumble every now and then, and Bank of America has recently analyzed how often this occurs. Since 1930, declines of at least 5 percent in the S&P 500 have occurred on average 3.3 times per year.
While a 10 percent or more drop in the market is less common, it is also considered normal. Some years have been completely spared, while in others investors have experienced a 10 percent setback two or three times.
On average, this happens slightly over once a year.
Significantly scary drops of 15 or 20 percent are thankfully rarer. 15 percent corrections have occurred once every other year, while drops of more than 20 percent have happened every 3-4 years, sometimes going nearly a decade without such large declines in the S&P 500.
Whether the current market turmoil will turn out to be another healthy and natural 5-10 percent correction or the beginning of something worse is uncertain, although many now feel compelled to make educated guesses.
Two key statistics to keep in mind for long-term investors looking to calm their worries are the favorable odds of making money for the patient, and the risky nature of trying to time the market’s movements:
1) The probability of losing money on the US stock market for those with a 5-year horizon is approximately 10 percent, and for a 10-year horizon, only 5 percent during the period from 1930 until today.
2) While the S&P 500 has climbed by almost 25,000 percent since 1930, the increase would have been only 76 percent if one missed the 10 best days each decade.
Therefore, it is important for investors to stay informed, stay patient, and avoid making hasty decisions based on market fluctuations.