Market Declines: A History of Recoveries
Market volatility and major downturns can often cause even the smartest investors to rethink their investment approach, including moving to cash. Emotions tend to creep into your investment decisions, and as we like to say - emotions don’t have a seat at the table when you’re trying to make sound investment decisions. Just like the age-old advice relatable in almost every scenario you can think of, “take the emotion out of it” has the same meaning when it comes to investing.
When markets are going through a period, or season of decline often referred to as a bear market and your investments start losing value, your initial response might be to panic and sell before you lose even more money. There is no judgement here, staying the course can be challenging because emotion and fear take over our pre-existing logic and practical understanding of how the markets work. It's human nature to bring emotions into investing, but it is also a likely way to fall short of your longer-term financial goals. This is where we come in, our job is to educate you on exactly what happens during and after market downturns, what the best course of action is in all scenarios and to tie it off, what has history taught us about the markets.
The chart below shows the maximum downturns in the market since 1929 – during the great depression all the way through to 2022. The chart demonstrates that although sharp, sudden market declines are disconcerting, history has shown to be very consistent in rebounds from market shocks, posting long term gains. Selling during a crisis locks in losses and attributes to missed opportunities to make up for it on the rebound.
Source: FactSet. Daily data from January 3, 1928 through December 30, 2022. Bear market is defined as the period from a peak to trough, with at least a 20% decline in the S&P 500 index price. Data in USD. Past performance is no guarantee of future results. It is not possible to invest in an index. Max drawdown is the largest drawdown (peak-to-trough) within each calendar year. This data is not intended to represent the performance of any MFS portfolio. *Data through 30 Dec 2022. Figure shown represents max drawdown for calendar year 2022 (beginning of event/crisis); it is not yet known what the max drawdown will be for this event/crisis. The S&P 500 Index measures the broad US stock market. Index performance does not include any investment-related fees or expenses. It is not possible to invest directly in an index.
When logic and reasoning are amiss and fear is at an all time high, at least we have historical data to fall back on to temper our emotions. History has shown, recoveries have followed declines, and investors that have stayed invested for the long term would have benefited from the recoveries.