How Does The Stock Market Perform After A Down Year?

Stock market performance after a down year is uncertain. With market uncertainty from events like the coronavirus-induced market meltdown, let's take a look at how the stock market performs after a down year. We'll start by looking at a little history.

Since 1928, the S&P 500 has had 29 inflation-adjusted down years. In other words, roughly 32% of the time you will lose money in the stock market at any given year. Further, the average return in a down year is -13.7%.

During these years when the S&P 500 experiences a negative return, the average return is -13.77%. The worst return was -38.08% in 1931 and the least severe negative return was in 2011, with a -.87% inflation-adjusted return.

Due to advancements in technology and efficiency, it's probably more important to look at the least 30 years of returns instead. 

Let's look at the data to see how the stock market has performed after a down year. 

Stock Market Peformance After A Down Year

Here is the stock market performance after a down year.

As you can see from the chart, the S&P 500 normally has a good year after a down year. In fact, 19 out of the 29 years when the S&P 500 experienced a negative return, it experienced a positive return in the following year. That's a 65.5% success rate.

But would you risk your life on a 65.5% success rate? Probably not. 

If you average all the 29 years of returns, you get an average rebound of 9.11%. The best return was 53.64% in 1953. And the worst year after a stock market decline was another -34.02% in 1973. Ouch.

1973 really stands out because you lost -21% and then lost another -34%. In other words, you lost a whopping 46% of your portfolio's value in just two years! That requires an almost 100% return just to get back to EVEN.

2000 was also a terrible year where you lost -12.02%, then lost another -13.04%, then lost another -23.9%! Talk about a terrible sequence of events for anybody who wanted to retire around then. Ultimately, you lost 42% of your portfolio in three years.

No wonder they called 2000 – 2010 the “lost decade.” Nobody made money in stocks for actually longer than 10 years given we saw a -36.61% meltdown in 2008. Stock market performance is tricky after a down year.

Invest In A Risk Appropriate Manner

As you can see from the data, there is plenty of risk when it comes to investing in the stock market. In any given year, you have a 32% chance of losing money. 

If you have to unfortunately sell during a downturn, like many people did during the 2008 and 2009 crisis, you could really miss out on gains years into the future given the stock market generally moves up and to the right. 

Your goal is to invest in a risk-appropriate manner based on your risk tolerance, the amount of time you are willing to work to make up for your gains, your cash flow, and your financial goals.

Follow the Financial SEER method if you want to quantify your risk tolerance and also figure out how much equity exposure you should have based on your risk tolerance.

Equities should be just one part of your net worth. You should also have exposure to real estate, fixed income, and risk-free assets like CDs and money market accounts for liquidity. 

The key to great long-term wealth is being able to preserve your wealth to take care of your family and for generations to come. It's the person who has no concept of risk tolerance who aggressively invests outside their comfort zone and loses it all.

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Stock market performance after a down year is not guaranteed to be positive. But what is guaranteed to help is if you stay on top of your finances.

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