Downturns and Recoveries

Focusing on a long-term investment plan is difficult to do when the market is going through periods of decline and extreme volatility. Continued investing during turbulent times, however, may offer long-term investors opportunities for potential gain.

Since 1926 there have been 14 stock market declines of 10% or greater. Each has varied in magnitude and duration, and has recovered (not including the current downturn of the early 2000's). In some cases a recovery occurred more quickly than the decline that preceded it, indicating that sometimes the best time to invest is when things look their worst.

A downturn represents at least a 10% decline in the index level of the S&P 500 from a newly established peak, and ends when the index value establishes a new low before coming back up to that peak. Recovery measures the time it took to recover from the bottom of a downturn to the peak level before the decline.

Fortunately, U.S. investors have enjoyed a stock market that continues to rise over time despite periodic drops in value. Each decline has been followed by an expansion of the overall market that produced substantial cumulative returns. While this evidence is no guarantee that the future will produce similar results, it's clear that the market has moved in cycles-with periods of unpredictable expansions and contractions.

Ultimately, investing in the stock market is a risky venture. Most long-term investors have found a need to use stocks in their investment plan. Whether planning for retirement, buying a new home or looking to pay for a child's education, stocks have provided the best long-term return compared to other options like bonds or cash accounts. Despite market volatility, economic crises, wars and world tragedies, the stock market has continued to grow.

A disciplined investment approach is still the best strategy for handling volatile markets. Staying focused on a long-term investment plan may enable you to participate in recoveries when they occur.