How Far is the Stock Market Likely to Fall?

Robert S. Cable

By Robert S. Cable, The Cable Group

Special to the Financial Independence Hub

For the vast majority of people, investing will, at times, become emotional. We may hope for the market to pull back into what is referred to as a “healthy correction” but when this ultimately happens it never feels healthy.

When we see our portfolios drop in value and the press trot out stories comparing today to the market tops of 2000 or 2007 or even the 1987 crash, we begin to think in terms of worst-case scenarios or even worse than worst case.

We’re conditioned to think in terms of extremes. We’re either at a market top and about to crash or less often, because fear is a stronger emotion than greed, near a market bottom and the market is about to soar. These extremes do occur and they’re always possible but the reality is that it’s unlikely we’re at one today because these extremes are indeed rare. There’s simply a lot more back-and-forth movement to the markets than the average investor recognizes.

It’s inevitable that we’re going to see the market fall 10% in the not too distant future. This happens more often than you likely think it does. Does this mean it’s the start of another 50% market crash? Maybe, but not likely.

Let history be our guide

For perspective it’s always best to let history be our guide.

Using the S&P 500 Index, from 1950 through late 2014, the market fell 10% or more 28 times or on average these declines occurred a little over every two years.

How many times did the market fall 20% or more? Nine times or, on average, once every seven years. What about 30%? Five times or about every 13 years. So when that totally unpredictable but inevitable market decline begins, expect that it will likely be contained and relatively mild but be mentally prepared that it could be one of those rare and more painful ones. These are the “bumps in the road” that equity investors periodically must experience in order to have exposure to an investment category that has historically provided them with above average returns. The facts are rather simple. But that doesn’t mean handling market declines is.

The table below shows the market’s 10% or more declines since 1950.


The Standard & Poors 500 Index’s Declines of 10% or More Since 1950
Total Declines of 10% or More 28
Median Loss -16.5%
Average Duration 7.8 months
Declines Greater Than 20% 9 times
Declines Greater Than 30% 5 times

The average downturn lasted less than eight months. And two thirds of the time these declines stopped short of the 20% mark. Half the time they were less than 15%. Smart investors remember that large losses are the exception, not the rule.

These statistics won’t make you feel a whole lot better when you’re seeing the value of your portfolio decline. But maybe they will help provide perspective on the decline you’re experiencing at the time.

No one can tell you with any degree of certainty when the next decline will begin. And you cannot tell when it does occur whether it will be of the usual 5% to 10% variety, the every-couple-of-years 15% kind or the rare larger one.

It pays to keep your emotions in check. In your lifetime you’ll almost certainly see declines of 10% or more maybe two dozen times. And if you bail out because your emotions take over telling you this just has to be one of those 50% crashes, you’ll likely be right a grand total of once and wrong about 95% of the time.

You’ll always experience some inevitable “bumps in the road” on the trip to reaching your goals. Take them in stride, stick with your plan and you’re highly likely to succeed. Don’t and the odds that you’ll reach your goals are about zero.

While we have absolutely no control over what the markets do, our success depends upon how we react to the stock market’s swings, especially the declines. The most financially prudent and rewarding thing to do is nothing.

Remember too that we generally design portfolios to play offence but also to switch to a somewhat defensive position when the data indicates that risk is high. So odds are you won’t feel the full brunt of most market declines. There’s actually a decent probability that you’ll benefit from the next market decline.

And always remember that we’re here to help you through those times when you feel you just have to do something that you will almost certainly later regret.

Robert S. Cable has worked in an investment advisory capacity since 1980. He — along with his investment team — was honoured by Dalbar as one of North America’s top investment advisors. He has been a speaker at numerous conferences in North America and has shared the stage with well-respected authors such as Jeremy J. Siegel (“Stocks for the Long Run”). Robert has been quoted in the Financial Post and in The Globe and Mail’s Report on Busines, and his articles have appeared in numerous financial publications in both Canada and the United States.

















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