Long-Term Market Gains Include Routine Corrections

August 22, 2013

Corrections can shake investors’ confidence, but it helps to take a longer perspective and realize that corrections are normal part of stock investing. In June 2012, we showed that every year since 1980 had a market correction. On average, these intra-year corrections lost 14.5%. Below, we looked back even farther to 1925 through 2011 and we found that corrections occurred in every one of the last 86 years, and the average drawdown over this long-term period was a loss of 11.6%.

Most Market Pullbacks are Minor

The chart below shows groups the S&P 500’s calendar year returns from lowest to highest and includes each year’s maximum drawdown, a measure from the market’s highest point during the year to its lowest point. Most of the market’s pullbacks have been relatively minor (10% or less). In fact, in 53 of the 86 years, the market’s pullback was 10% or less.

In 18 of these 86 years, the market lost between 10% and 20%, and yet in many of those years (such as 1933, 1971, 1998, 2009), the market recovered and produced excellent annual returns. Of course, as investors know all-too-well, steeper drawdowns do happen but they are far less common: the market lost 30% or more in just 8 of the past 86 years.


The chart shows that market corrections are common, and, more importantly, so are market gains.

Market Gains are Common

The market ended up in the majority (62) of these 86 years. In half of these up years (32), the market gained over 20% and 18 of these years had gains over 30%.

We know that the past may not necessarily predict the future, but the long-term history of the S&P 500 shows that investors would be wise to expect corrections and learn to ride through them if they also expect to participate in the market’s long-term gains.

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