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The 1 Statistic That Should Put Today's Long-Term Investors at Ease

By Sean Williams – Apr 17, 2018 at 8:02AM

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Let's face it: Investors today have it much better than their parents or grandparents.

What a difference a year can make. Last year, the stock market could seemingly do no wrong. At no point during the year was there even the faintest downdraft in the Dow Jones Industrial Average (^DJI -0.59%) or S&P 500 (^GSPC -0.46%) that even resembled a correction -- i.e., a drop of 10% or more from a recent high.

Then February 2018 hit, and the wheels fell off the wagon.

Over a roughly two-month span, the Dow Jones Industrial Average has logged four of its nine largest single-day point declines in history. Meanwhile, the broader-based S&P 500 has recorded six of its 20 largest single-day point drops since the beginning of February. It's been a true wake-up call to investors that the stock market can, and will, move in both directions. 

A stock trader standing in front of monitors with stock charts on them.

Image source: Getty Images.

The battle between panic and persistence

As you might imagine, panic is a normal reaction when the indexes fall deep into the red. Data aggregated from market analytics firm Yardeni Research shows that, while the stock market spends far more time rallying in a bull market than falling as a result of a correction or bear market (a drop of 20% or more from a recent high), the swiftness of downside moves usually catches investors off guard. The February push into correction territory took just 13 calendar days to shave off trillions in market value.

Yet, running for the hills is almost always the wrong move to make. Historically, the stock market returns an average of 7% annually, inclusive of dividend reinvestment and when adjusted for inflation. This would suggest that sticking to your investing thesis should net you solid long-haul returns.

So, what's an investor to do? We don't know when stock market corrections will occur, we have no clue how much the market will drop, and we'll never know ahead of time how long corrections will last. But we do have one piece of data confirming that today's investors have it so much better off than our parents or grandparents. Ultimately, it's this one statistic that should win out and have today's long-term investors feeling pretty good about themselves and their investment portfolios at the end of the day.

This statistic should make you feel a lot better about your investments

Using data from Yardeni Research, I went back and examined every single bear market correction -- an actual, non-rounded, move lower of more than 20% -- since the S&P 500 was formed in 1929. What I found were 20 bear markets over the last 90 years. But it's not the total number of bear markets that stands out so much as their placement and frequency. 

A table showing the S&P 500's 20 bear markets since inception in 1929.

Data source: Yardeni Research. Table by author. S&P 500's 20 bear markets since inception.

As you can clearly see, we've only had two bear markets over the past 30 years. Now, that doesn't mean we're not going to get another. If we've learned anything, it's that bear markets are an inevitable part of the investing cycle. But there's been a clearly defined shift, based on this data, in bear market occurrences. Between 1929 and 1946, investors suffered through 10 bear market corrections. In the 41 years that followed, another eight bear markets.

What changed over these decades? While there are likely a number of factors at work, my strong belief is that investor access to information is what's made the difference. You see, prior to the late 1980s, there was virtually no immediate access to information. The internet didn't exist, and nearly everyone checked the performance of their stocks in the newspaper the following morning. Since the advent of the internet, the dissemination of data has become rapid, allowing the retail investor to be more informed than he or she has ever been.

A man reading the financial section of a newspaper.

Image source: Getty Images.

Understandably, computers themselves have been known to briefly malfunction and lead to "flash crashes" in the stock market. But as a whole, they've made it easier than ever to access financial data, allowing investors to keep a level head.

In other words, as long as Main Street and Wall Street have access to the same information with a click of their mouses, the trade imbalances and fear that manifested in the 1930s seems unlikely to repeat itself. Ultimately, that should make investors feel a lot better about trusting their holdings over the long haul.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$29,417.04 (-0.59%) $-173.37
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,676.44 (-0.46%) $-16.79

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