Stock market drawdowns are normal. They’re never fun, but they are a routine occurrence. As of market close on October 11, 2018, the S&P 500 Index was only 6.9% off its recent high from September 20.
Most of us have said or thought something like: “If only I had invested in __________, I would have so much money today.” Whether it’s the stock of Amazon, Google, Netflix, or Apple, the growth of these stocks over a long period of time is incredible. But when we examine the historical price movement of these stocks, we see that early investors have endured a bumpy ride.
Meir Statman is a Professor of Finance at Santa Clara University. He has gained increasing acclaim in the financial world for his work in the field of Behavioral Finance. What is behavioral finance? It studies the intersection of our behaviors (which are driven by our thoughts and feelings) and our money.
Friday, March 9th marked 9 years since the US stock market bottomed during the Great Recession of 2008-2009. We have witnessed excellent stock market and economic growth since those dark times, leading many people to ask the question: “How long can this expansion/rally continue?”
Before we answer that question, a short stock market history lesson is in order. While the US stock market has in fact rallied an incredible 380% since the stock market bottom (as measured by the total return of the S&P 500 Index), it has not been without significant drawdowns:
- From July 7, 2011 – October 3, 2011, the S&P 500 Index lost 18.4%. During that same time period, the global stock market (as measured by ticker ACWI) lost 22.5%.
- From May 19, 2015 – February 11, 2016, the S&P 500 Index lost 12.8%, while the global stock market was down 19.1%.
So, there have been “breathers” (that’s a nice way of putting it) during this period of sustained economic and stock market growth. In other words, we have taken our lumps along the way.