There are two sides to stock market corrections. In this post we’ll take a historical look at the length and degree of the drawdowns. We’ll also look to the great potential of investing through the corrections. The long term returns you receive might be the greatest at and near the market bottoms. Meaning the worse things get, the better things get – when it comes to wealth creation. We’re making the most of market corrections on the Sunday Reads.
Stocks perform very well after market corrections.
But those market corrections come in all shapes and sizes. Let’s have a look at some stock market correction history. Here’s the U.S. stock market corrections by year, and with maximum pullback shown.
Bear markets and how long they last.
The bear market framing
The steepest fall, a peak-to-trough decline of nearly 57%, occurred in the 17 months that marked the 17-month bear market that accompanied the 2007-2009 financial crisis. The longest was a 48.2% drop that ran for nearly 21 months in 1973-74. The shortest was the nearly 34% drop that took place over just 23 trading sessions as the onset of the COVID-19 pandemic sparked a global rout that bottomed out on March 23, 2020. .
Here’s a look at the drawdowns in chart form, from the depression era.
And a very nice perspective showing the annual returns each year and maximum drawdown in each year.
A look at corrections, minor and more ‘major’ from the financial crisis of 2008-2009.
Here’s the returns from the market bottoms. The table also shows the 18 periods of 15% or more market declines from the 1920’s. For U.S. stocks –
We see that there are also some quick returns to be had from the market botttoms. But of course, no one knows where the bottom might be. They don’t ring a bell at the market bottom. All we know is that there are good returns to be had by staying the course and investing through market corrections.
And more on that from Liz Sonders …
The second worst decline in history
For the first 88 trading days of a year, this pullback is in second place.
And here’s the drawdown in chart form.
And here’s a bit of history on corrections; how often they come along, and how long they last.
Recession or no recession?
A major distinction for market corrections is whether or not they happen during a recession. The green dots are sans recessions. Red dots are corrections during a recession.
We see that non recession corrections are near 25% and last 213 days, while recession corrections are in the 35% area (on average) and last 353 days. The mean for all events is a 31% loss and a correction duration of 299 days.
Awareness = preparedness
I write about risk, not so that you should be scared, but so that you are aware.
If you have a concrete investment plan, you can be fully invested at all times. You simply add money on a regular schedule, then rebalance on schedule.
The seeds of the coming boom are sewn during the current bust.
David Alton Clark, Seeking Alpha
Major market corrections are normal, and necessary. It’s like weeding the garden.
Every now and then, we need to get rid of those weeds. It’s a normal and healthy process, it’s an expected and needed part of investing… err, gardening. The weeds are taking up needed space and nutrients required for the true owners of the garden to flourish. They must go.
Dale Roberts, Seeking Alpha (2014)
Invest within your risk tolerance level
This is from a post I wrote for Seeking Alpha in May of 2014. It shows the drawdown and recovery time required at various risk levels (stock to bond ratios). The period of evaluation begins in October of 2007. The portfolio returns represents the (eventual) positive returns from the time of article posting (May 2014).
Of course every corrections is unique. And past performance does not guarantee future reurns.
Here’s more of the same, in chart form. In that tweet you’ll also see the asset returns over the last 20 years. We also see that the average investor did not fare well. Too many invest outside of their comfort zone, outside of their risk tolerance level.
No one knows how long the recent correction might take. What we know is that stocks and bonds are going on sale. Stick to your investment plan. Make sure that you know your tolerance for risk.
Always a must read – the new balanced portfolio.
More weekend reads
On My Own Advisor, Mark has been busy. Here is the April dividend update. Keep in mind that Mark builds around those dividend stocks and fills in any portfolio holes with U.S. and international ETFs. We’ll call that the stock and ETF hybrid approach. Mark will also hold a cash position in his semi-retirement stage.
My core Canadian stocks have certainly delivered over the last year. No bear market here.
We also invest in Canadian energy stocks that have delviered 100% over the last year. We hold U.S. stocks, bonds, bitcoin and ethereum and commodities.
And the Weekend Reads – the upside to higher rates. Bond yields and savings account rates and GICs are moving in the right direction .
Readers might check out EQ Bank for savings and those GICs. We use EQ Bank for our emergency fund and have been very pleased with the service and site functionality.
Buffett’s investment buffet
On Findependence Hub, here’s everything that is owned by Warren Buffett’s Berkshire Hathaway. We’re happy to own Berkshire (BRK.B), it is the largest stock position in one of my wife’s accounts. I wrote on that, here …
You can invest with Warren Buffett, or you can invest like Warren Buffett. Mr B. has started to put that massive cash pile to work. He likes energy and more insurance.
On Tawcan, Bob looks at Evermore’s retirement ETFs. Bob interviewed the folks at Evermore. Here’s a quote on portfolio contruction:
And fifth, dividend ETFs tend to be more correlated than index ETFs to bond ETFs. To minimize overall portfolio volatility, improve risk-return metrics, and help ensure that investors don’t outlive their savings, it is preferable to pair the bond component with an equity component that is less correlated, ideally negatively correlated. That’s another reason why we chose to use index ETFs rather than dividend ETFs.
For more on the retirement front, Fritz at The Retirement Manifesto looks at the 5 most important factors in your decision to retire.
Here’s the week in review on Dividend Hawk. You’ll find the stock stories and top blog post reads for the week.
With respect to investing I use the world simple with regularity. Given that, let’s have a look at – investing simple as that, on FiPhysician.
On stocktrades.ca, Mathieu Litalien offers the top 6 Canadian REITs for 2022.
Emergency funds
On the Maple Money podcast the importance of having that emergency fund.
We experienced that need, this past week.
At Banker on Wheels – what does the bond market rout mean for the stock market?
Kyle Provost continues to do a wonderful job covering my old gig – Making Sense of the Markets on MoneySense.
Cashback update. Big spenders. Here’s my review of the Tangerine Cash Back Credit Card.
And it was nice to get back to more normal. We took in the John Mayer concert.
And it was nice to be noted as one of the top financial ‘influencers’ in Canada. Thanks to the folks at Hardbacon for that.
Preet is celebrating 100k subscribers and to celebrate is giving away cold hard cash.
Cut your fees, get some offers here …
While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me pay the bills for this site. That will allow me to keep this site free of ads and easy to read.
You will also earn a break on fees by way of many of those partnership links.
Canada’s top-ranked discount brokerage
Cut the Crap Investing readers can earn a break on fees at Questrade by way of that partnership link.
Here’s Canada’s top-performing Robo Advisor.
I have partnerships with several of the leading Canadian Robo Advisors such as Justwealth, BMO Smartfolio ,Wealthsimple, Nest Wealth and Questwealth from Questrade.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
Our savings accounts
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are now at 1.50%. You’ll find some higher rates on certain GICs. They now also offer U.S. dollar accounts. They have been awesome. Rates have seen a recent uptick.
Our cashback credit card
We make between $60 to $70 every month! And that’s on everyday spending. There are no fees with …
The Tangerine Cash Back Credit Card
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Thank you Dale for this post in particular, the timing is perfect. It provides just the reassurance I need right now – trust in the plan!
All the best