Economics and markets

Why to focus on long-term market results

April 13, 2023

A mountain chart shows that since 1980, there have been 12 bear markets, or market declines of 20% or more, in global equities. The starting dates for the first 11 were November 1980, August 1987, January 1990, July 1998, March 2000, March 2002, November 2007, May 2011, May 2015, January 2018, and February 2020. The bear market that began in January 2022 hasn’t ended, but past bear markets have recovered and produced strong results over the long term.
A line chart shows the performance of the Standard & Poor’s 500 Index from 1973 through 2022, including its performance during seven recessions. Equity prices frequently begin to fall prior to the start of a recession and hit their lows during the recession.   During the recession that began in November 1973 and ended in February 1975, the S&P 500 Index reached its low toward the end of the period, in September 1974.  The next recession was much shorter, from January through June 1980. During this six-month period, the index reached its low in March, slightly earlier than in the previous recession.  The recession that began in July 1981 lasted until October 1982. The low point of the S&P 500 Index occurred relatively late in the period, in July 1982.  During the recession that began in July 1990 and extended through February 1991, the index hit its low in the middle of the period, in October 1990.  For the recession that occurred from March through October 2001, the low occurred late in the period, in September.  The next recession started in December 2007 and lasted through May 2009. The low for the S&P 500 Index during this period occurred near the end of the period, in February 2009.  During the 2020 recession, which lasted only two months, the low occurred during the latter half of the period, in March.
A mountain chart shows that from January 1, 1980, through December 31, 2022, the average length of a bear market, or a market decline of 20% or, was 289 days, while the average length of a bull market was 997 days. The average return of a bear market was negative 29% and the average return of a bull market was 96%.
Line chart shows the daily returns of the Standard & Poor’s 500 Index from January 1, 1980, through December 31, 2022. The chart shows that the best and worst trading days often occur within days of each other. Ten of the 20 best trading days occurred during years with negative total returns, while 11 of the 20 worst trading days occurred in years with positive total returns.
Illustration shows the return distribution of all-cash portfolios over 3-month, 6-month, and 12-month periods following 3-month periods in which equities declined 10% or more from January 1, 1980, through December 31, 2022.   Investors have a 74% probability of underperforming the market, with an average underperformance of 4.1%, when they have moved their balanced 60% stock/40% bond portfolios into 100% cash for three months after a severe market event.  Portfolio underperformance gets worse for those who convert their balanced portfolios to cash and hold it over longer periods of time. Converting a 60/40 portfolio to cash has led to a 71% probability of underperformance over a six-month period, with an average underperformance of 7.4%. Investors who have converted their 60/40 portfolio to cash and held it for 12 months have an 87% probability of underperforming, with an average underperformance of 13.5%.
A bubble chart shows the percentage of time periods (1, 3, and 6 months and 1, 3, and 5 years) when both U.S. stocks and bonds experienced negative returns and when a 60% stock/40% bond portfolio experienced negative returns.  While stocks and bonds have both experienced negative performance in the same month 15.3% of the time, over the same three-month period 9.3% of the time, and over the same six-month period 4.8% of the time, these two asset classes have both experienced negative total returns only 1.8% of the time over one-year periods. Since 1976, investors have never experienced a three- or five-year period during which both stocks and bonds produced losses.  A similar pattern exists with a 60/40 portfolio, which has produced negative returns over a one-month period 33.7% of the time, over the same three-month period 25.7% of the time, and over the same six-month period 19.9% of the time.   But over longer periods of time, a 60/40 portfolio has proven more resilient. Over one-year periods, it has produced negative returns 15.2% of the time. Over three- and five-year periods, it has produced negative returns just 8.1% and 0% of the time, respectively.
This visual includes images of a headset, clock, wallet, line chart, and pie chart. The image of the headset reflects the need for investors to tune out the latest headlines and other noise. The image of the clock symbolizes the need for investors to revisit their asset allocations if they are particularly concerned about market corrections. The image of a wallet reflects the importance of controlling investment costs. The line chart symbolizes the importance of setting realistic expectations for your portfolio. Finally, the pie chart reflects the importance of holding a diversified portfolio.
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