Declines and recovery
Declines of ten percent happen roughly once a year on average, declines of more than forty percent several times a century. Recovery took anything from months to decades.
If you invest, you should know three orders of magnitude. Small declines of about ten percent happen in broad stock markets roughly once a year on long term average. They aren't a special event. They're part of normal operation.
Medium declines of twenty percent or more happen every few years. Severe declines of forty to over eighty percent happened several times in the last century: from 1929 to 1932, after 2000 and from 2007 to 2009.
How long recovery takes varies a lot. After the crash in spring 2020 it was only months. After 1929, counting without dividends and without inflation, it took about twenty five years for the American stock market to get back to its old high.
The most important point: these numbers don't argue against stocks. They explain why money you'll need soon doesn't belong there, and why the emergency fund comes before the portfolio.
The deeper a decline, the less often it happens. But very large crashes happen far more often than a normal distribution would suggest. Anyone calculating from the past how often things get really bad therefore usually underestimates the danger.
How long a recovery took depends heavily on how you count. Without dividends and without inflation you get much longer periods than with both. For the period after 1929 you'll therefore find figures between about seven and a half and twenty five years. Both are calculated correctly, they just measure different things.
For your planning, the bad case counts, not the average. Choose your investment horizon so that even a recovery as long as the longest in the past wouldn't force you to sell. That's where the rule of thumb comes from not to put money you'll need in the next three years into investments that swing.
Data as text
Drops of 10 percent happen about every year, drops of 20 percent every few years, and drops of 40 percent a handful of times per century.
Summary
- A ten percent decline is normal operation, not the exception.
- Historical recovery periods ranged from months to over two decades.
- Plan for the unfavorable case, not the average.
Did you get it?
How often do ten-percent declines occur?
In broad stock markets, roughly once a year on long term average.
Why do different recovery times circulate for the period after 1929?
Because they depend on whether dividends and inflation are included. Both figures are right.
What should the investment horizon be based on?
On the bad case and not the average, so you're never forced to sell.
Sources and further reading
- Long-run price series of broad stock indices; figures on recovery time after 1929 vary depending on whether dividends and inflation are accounted for.
Related
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- Bull market, bear market, crash, bubbleStage 1
- Active funds against the indexReality Check