Volatility is a Normal Feature of Investment Markets

Lessons Learned From Stock Market Declines

  1. From time to time, stock markets go through long and deep periods of decline.
  2. After a large decline, it is hard to predict how long it will take for stock markets to recover.
  3. Over the very long run, stock markets have been very generous to investors who can get through long periods of decline.
  4. During times of a rapid and deep decline, investors should avoid panic selling.
  5. Sometimes, the market and economy move in opposite directions.

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At this point, we don’t know how severe this current market decline will be, how long it will last, or how long it will take to recover. But if history is any guide, prudent long-term investors who can withstand the risks of equity investing should stay the course and not panic.

This is a list of the 22 worst market declines in the nearly 152-year history of the U.S. stock market.

The table shows the month at which the cumulative value peaked before the decline, the month at which the stock market decline was at its worst (the trough), and the month in which it reached the previous peak.

Not surprisingly, the largest decline occurred with the crash of 1929 when the cumulative value dropped by 79% and took four and a half years to recover. (This recovery was short-lived. It was followed by an almost 50% decline, the fifth-largest decline on list.)

In more recent memory was the second-largest decline of 57.6%, which occurred during the 2000s. That decade started with a crash, followed by a near recovery, but then experienced another crash—the global financial crisis.

To put things in perspective, note that the decline of 18.3% (the 18th on list) that started with the onset of the novel coronavirus pandemic took only four months to recover, though the pandemic lasted far longer. This shows how the market can at times be disconnected from the real world, and it’s a stark reminder that the stock market is not the economy.

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