Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director

Investors were jolted out of complacency in late January and early February when the U.S. stock market suffered its first correction in more than two years.  This unpleasant development was a reminder that markets are volatile and there is a certain amount of risk in investing in stocks.  Since the selloff, the markets have regained some of their losses and are back to positive territory for the year to date.

Events like this always send analysts scrambling to dig up historic data to see how markets have reacted in the past to similar selloffs.  Of course, no two corrections are exactly alike but there are some lessons to be learned as we wade through all the data.  For now, I’ll focus on looking at annual returns on the S&P 500 from 1928 through 2017.  As you can imagine, returns varied widely over this 90-year period from a loss of 43.8% in 1931 to a gain of 52.6% in 1954.

Let’s take a look at one of those years with a positive but rather boring return of 5.8%.  If you went away for a year came back and saw that your stocks gained 5.8% you would probably be satisfied, but not particularly thrilled, thinking not much happened during the year.  You would probably not be panicking and pulling all of your money out of the market.  Yet the year in question, with a boring 5.8% annual return was 1987, the year of Black Monday that saw stocks lose one-quarter of their value in a single trading day in October.  Some investors gave up on the market that year due to the short-term shock and missed out on the inevitable recovery.

One thing that leaps out when you look at the returns of the past 90 years in the chart below is that the chart skews toward the right, meaning positive years are much more common than negative years.  Also, big down years with losses of 10% or more are relatively rare.  The chart below shows how many years S&P 500 performance fell into each of the return ranges from 1928 through 2017.

In all, we’ve had 66 years of positive returns and only 24 years with losses.  The return range we’ve seen most often is a gain of 10% to 20%, which has happened 19 times in the past 90 years.  Interestingly, we’ve had as many years with remarkable returns of 20% to 30% (15 years) as we’ve had with modest returns of 0% to 10%.

On the negative side, the most common return range is a loss of 0% to 10%, which has happened 13 times.  Surprisingly, we’ve had almost as many years with exceptional gains of 30% to 40% (12 years) as we have had with less than 10% in losses.

Losses are uncomfortable to live through, but the chart clearly shows that we have been more likely to experience healthy gains on our stock investments than debilitating losses.  Remaining invested during downturns takes patience but it is crucial to achieving long-term investing success.