Do Downturns Lead to Down Years?

As of Thursday’s close, the S&P 500 was down about 14% from its high. Since 1950, the S&P 500 Index averages a drawdown of 13.6% over the course of a calendar year. In other words, we are hovering around the average intra-year decline.

It is important to remember that intra-year corrections are just something that happens routinely in the stock market. Volatility is a normal part of investing and does not hold much information for the long-term investor. The best antidote to volatility is diversification, not avoidance.

Even if the S&P 500 Index continues to go down from here, we would encourage you to take a long-term outlook. If recent history is any indication, an intra-year downturn does not mean that the S&P 500 will not end the year with a positive return. In 17 out of the last 20 years, the market ended positively despite notable dips during those years.

Hold firm. Stock market returns are the reward for taking the inherent risk of stock market investing.  Selling now to avoid the risk is just as likely to reduce return. It should be an axiom to the investor that an effort to reduce risk always and everywhere reduces returns.