Although investors claim to accept market fluctuation as normal we find precipitous selloffs overwhelming. Why? . . . because they happen rapidly and randomly.
Lost in the sea of emotion is that equity market annual returns have been mostly positive despite significant market declines in each year. Since 1980 the average intra-year pullback in the S&P 500 has been roughly 14% yet the index has closed positive in 28 out of 36 years (78% of the time) producing a compound return of 11%/yr.
Examining market peaks and bottoms over a longer time horizon (1928 – 2015) shows that after declines of up to 20% from previous peaks a new market high is reached in less than 12 months a remarkable 99% of the time.
The typical investor responds to swift downturns with panic selling yet data suggests riding out the storm. We can’t control the markets but we can control how we react with them.