Our lives will sometimes require us to deal with serious, sudden and unexpected events:  storm damage to your home, an auto accident or a sudden health issue.  These events can’t be ignored and often require immediate action, such as a call to 9-1-1 or your insurance company.  Fortunately, most of the unexpected events that happen to us aren’t all that serious.

Some investors were recently upset by another kind of sudden and unexpected event: a market drop of over 6% for the S&P 500 Index that occurred over the course of just two days, Friday, August 2nd and Monday, August 5th. This was on top of a decline of almost 4% since the most recent market high on July 16th.

Now, thinking back on those two days, answer these questions:

• What was your visceral reaction to it?  

• On a “seriousness scale” of one to ten (ten = storm damage, auto accident or health issue), how would you rate it as it was happening?  

• If you rated it at or close to a ten, did you have an overriding urge to do something about it?  

• Did you feel any sense of panic rising within you?

• How often did you look up your investment accounts to tally up the dollar decline in your wealth?

I’m not here to judge or grade your answers as right or wrong.  Emotional responses are what they are.  I only wish to help you put things into some perspective.  To do that, I have one more question for you:  Count up the number of serious, sudden and unexpected life events (such as those three mentioned above) that have happened to you over the past fifteen years (since March of 2009).  I truly hope that it is a very, very low number.

One other question for you, our most patient reader, is this:  How many times do you think that the stock market (represented by the S&P 500 Index) has declined 5% or more over the past fifteen years?  If you guessed 10 times, I regret to say that you would not make the Olympic medal podium - not even close.  Doubling it to 20 times only gets you the bronze. Guess 25 times, and you’ve earned the silver.  The gold medal answer? 29 times.  That’s about twice per year since 2009.

Here is a list of those 29 market corrections that includes the dates and duration of each drawdown, the percentage decline, and the financial media headlines at the time purporting to give a reason for the declines.  Notice that the median drawdown was -7.6% and the median duration was 26 days [1].

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Other than the dramatic COVID-19 Pandemic drop of -35.4% (which only lasted 33 days), how many of these do you remember?  Probably very few. Our brains, it seems, are wired to downplay the lingering emotional power of negative events over time.  As a recent Wall Street Journal article mentioned, psychologists call this the Fading Affect Bias [2]. To quote from the article, “You remember what happened, but it doesn’t feel as negative compared to how you felt at first.”

In spite of these 29 drawdowns, the S&P 500 Index was up 704% from 3/9/2009 to 8/14/2024 [3]:

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Here’s another chart that takes a longer time frame, from 1928 through 2023, which shows that drawdowns of 5% or mor happen within 94% of those 96 calendar years[4].  And 70 of those 96 years ended with a positive return at the end of the year. Bear markets of 20% or more occurred in about one of every four years.

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The bottom line for stock investors is that market volatility is not a “bug in the system” but an inescapable reality of investing in equities.  Think of it as not only the price of admission, but the price of continuing to seek the potential wealth creation represented by staying invested in the companies that comprise the stock market.  The saying “No pain, no gain” applies here.  Remember also that volatility is not just downward but comes with rising markets as well.  

Because no one really knows precisely what the stock market (or any individual stock) should be “priced at” at any moment in time, those values will inevitably fluctuate, sometimes wildly, causing volatility.  Investors often disagree on what stock valuations should be.  This is what makes a market in the first place.  For every buyer, there is a seller.  This is as it should be.  True underlying value shows itself in the long run.

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[1]Charlie Bilello, Posted 8/6/24 on X

[2] https://www.wsj.com/lifestyle/relationships/moral-decline-study-psychology-8635c34b?mod=wsjhp_columnists_pos3

[3] YCharts

[4] https://awealthofcommonsense.com/2024/08/this-is-normal-2/