As I write this, the market is down over 2% on the day with the Dow shedding more than 350 points. No doubt, this will be a topic of all evening newscasts. It’s important to keep things in perspective.
We’ve had a great run since the bottom of the market in the spring of 2009. Even with the recent decline, the market is up over 200% since the bottom. That’s about a 17% annual return, substantially better than the markets historical average of about 10%. Of course, the market being the market, it didn’t produce these exceptional returns without fail. If fact, this is the fourth time the market has seen a significant decline since 2009.
The red sections in the graph below show the current decline superimposed on 3 previous declines. As you can see, this has happened before. In fact, the decline in 2011 was much worse. In each case, the market recovered from the loss.
Looking at 2011, you may be thinking that the market will see more losses ahead, and you may be right. However, you’ll not only need to determine the best time to sell but you’ll also need to figure out when to get back in. This wont be easy. The bottom of the market is usually marked by “doom and gloom” forecasts. By the time things seem “safe” the market typically recovers substantially and most investors would have done better by simply staying invested. In fact, one of the biggest factors in the underperformance of individual investors is selling when the market declines and getting back in at a higher price.