Financial Planning Fridays #61: Normal Market Declines

The market goes down all the time. But, it never stays there.

Over the last 15 years, the market has had an average temporary decline of 16.8% per year. A 16.8% loss every single year! And during that same 15-year period, the S&P 500 had an average return of positive 10.67% per year.

But to achieve that excellent return, the price that you had to pay was to maintain your investment strategy through an average downturn of 16.8%.

We don’t have to like it, but what is critical to understand is that, on average, the market will be down significantly during the year at some point. These are the essential moments where we must stick with our long-term strategy in order to reach our goals.

Furthermore, despite a temporary decline every single year, the market still finished positive in 12 of the past 15 years. In fact, the market was up more than 20% in 5 of those 15 years!

This also includes 2009 and 2020, where the market finished up 26% and 18%, respectively, after declines of more than 25% during those years!

This data shows that, as long as you are properly diversified, you should hold your investments during market declines. Or, even better, be prepared ahead of time to rebalance and take advantage of these declines by shifting additional funds to stock while they are temporarily discounted.

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