Mark was nervous about taking the leap and investing in the stock market. As a 35-year-old health-care worker, he’d never had time to learn about the market — but with a lot of money sitting in the bank, he felt it was time to get some professional help and start making his money work for him.
He started working with an advisor, who suggested — as part of a larger financial plan — that Mark put $95,000 into an S&P 500 index fund in early February.
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But then the market plummeted and by early April he’d lost about $15,000. While the market has made a slight recovery, Mark has yet to recoup his original investment. No wonder he’s anxious.
His advisor has told him to stay calm and hold on, but he’s wondering how long it could take till he breaks even, let alone sees a return.
No easy answers with a market correction
Numerous factors impact stock market returns, including overall economic conditions (e.g., GDP, unemployment rates), inflation, interest rates, market sentiment and geopolitical events. There’s no simple formula to predict when the market will fully recover. It could be days; it could be years.
While past performance may not predict future performance, Mark’s advisor pointed out some recurring themes that may be helpful in easing his mind.
Stock markets tend to go up over time as economies grow. For instance, the S&P 500 has returned about 10% per year (about 7% after inflation) since its inception in 1957.
This doesn’t mean the market won’t experience volatility along the way. For example, in 2024, the S&P 500’s worst sell-off was 8.45%, its biggest rally was 31.54% and it ended the year up 25.71%. Also, declines of 10% or more are common, occurring in more than 47% of the calendar years from 1980 through 2024.
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Between the Second World War and 2020, there were 26 market corrections of 10% or more from a recent 52-week high close, according to a Goldman Sachs analysis.
The average decline in these bear markets was 13.7% over four months. It took an average four months to recover the losses. In 12 of the 26 corrections, it took an average 24 months to recover.
There have already been two bear markets in the 2020s — outside the period studied by Goldman Sachs.
The first, which followed a market peak in December 2019, took only four months to recover from the March 2020 trough. The second, driven by the war in Ukraine, supply chain disruptions and rising inflation, took six months to recover from its September 2022 trough.
How long this current correction will take to recover is uncertain; it could progress into a bear market or it could recover quickly.
However, it’s being driven by erratic policy decisions. If these continue to recur, they’ll maintain a high degree of uncertainty — which is bad for markets — and could harm the underlying economic fundamentals.
This correction also appears somewhat atypical, as usually equity market sell-offs are “risk-off” trades where investors move into less risky assets such as Treasurys. This time, long-dated Treasury prices and the U.S. dollar have fallen as well.
Dealing with a market sell-off
What should Mark do to deal with this uncertainty?
It can be tempting to get out when markets are falling. After all, the prospect of continued losses is daunting — but research shows that time spent out of the market can be costly.
Missing just the five best days for the S&P 500 from Jan. 1, 1988 to Dec. 31, 2024 might mean missing out on the potential 37% gains that some of those who stayed invested in the market enjoyed over that period.
In early April, the S&P 500 lost 12% over four days — a move some might see as a sign to exit the market.
Right after, the market leapt 9.52% to notch its third biggest single-day gain in the post-WWII period. If Mark missed this day, he would have missed a chance to recoup a substantial portion of his losses.
To take advantage of this market sell-off, Mark might consider putting more money into the market by dollar-cost averaging.
This means he’ll buy the same dollar amount of units of the S&P index fund at regular periods, such as every month, regardless of the price of the index fund. In this way, he’ll buy more units when the fund is cheaper and fewer when it’s more expensive.
Since his S&P 500 index fund is part of a larger portfolio, he should also reconsider rebalancing. For instance, if his portfolio was invested 80% in equities and 20% in fixed income, he might want to sell fixed income to buy equities to ensure this weighting is maintained.
Luckily, Mark is a few decades away from retirement and he won’t realize any losses until he sells, so he has time to weather a long bear market to see it through to recovery.
But he’ll want to make sure his investments are invested appropriately for his goals, age and risk tolerance — and maybe not check on them daily.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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