I recently received the following email:
“My experience with the stock market as an adult has been:
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- I graduated college around the Dotcom crash
- I started a construction company at the beginning of the housing crisis
- I worked on becoming a dentist during the lost decade
- And I started a dental practice from scratch less than a year before COVID
Is this volatility over the past two decades ‘normal’ or have we experienced more frequent and bigger downturns than in the past?”
What a tailor-made question for a financial newsletter.
I would define a “big” downturn in the stock market as a drop of 20% or more, which the investment world categorizes as a bear market.
Perhaps your definition of a big downturn is 10%, but since declines of 10% or more happen about once every year-and-a-half, they’re not too noteworthy.
Here’s a list of all the bear markets over the past 100 years:
By my count, there have been 22 bear markets with losses of 20% or worse.
Here’s the breakdown by decade:
- 1930s – 7 (Great Depression and World War II)
- 1940s – 3
- 1950s – 1
- 1960s – 3
- 1970s – 1
- 1980s – 2
- 1990s – 0
- 2000s – 2
- 2010s – 0
- 2020s – 2
In the 57 years from 1930 to 1987, the U.S. experienced 17 bear markets. We’ve only had four in the 37 years since.
Ben Carlson put together a graph that accounts for how long each bear market lasted to show how much time the U.S. stock market has been in a bear market by decade:
If we ignore everything that happened pre-1950 on the basis that we now live in a more modern economy compared to the 1900s to 1940s era America, the U.S. stock market averaged a 20% or worse drawdown about once every seven years from 1950 to the year 2000.
Since 2000, we’ve averaged a bear market once every 6.25 years. Nearly the exact same frequency as the five previous decades.
Taking out the Great Depression, we get a bear market once every six years on average. If you include the Great Depression, that average goes down to once every four years.
Think about that for a second. We’re going to experience significant turbulence in the stock market on about the same frequency as we watch the summer Olympics. This has been going on for 100 years now, yet every time there’s a downswing in stock prices, we can’t help but lose our minds a bit. Of course, social media and the news don’t help with our overreactions either.
However, even with all of these drawdowns, you can still make money in the stock market.
Comparing it to the list above, here’s a breakdown of average annual U.S. market returns by decade:
- 1930s – (0.11%)
- 1940s – 8.99%
- 1950s – 19.1%
- 1960s – 7.99%
- 1970s – 5.94%
- 1980s – 17.01%
- 1990s – 18.42%
- 2000s – (0.72%)
- 2010s – 13.26%
- 2020s – 11.51%
Even with an insane seven bear markets during the 1930s, if you had stayed invested during the whole decade, you would have only lost a cumulative 1% on your investments. Meaning a $1,000 investment would still be worth $990 at the end of the period.
What if we looked at the 2020s? We’ve had two full bear markets in the short span of five years, and still, if you stayed invested, an initial $1,000 investment would be worth $1,800 today.
And last but not least, despite the four bear markets this century, assuming you invested your money on January 1st, 2000, and held it until today, you would still have achieved a sixfold return on your original investment.
What’s cool about the stock market is that despite the big, frequent declines, it also offers bigger and even more frequent gains.
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.