Market Dips

Marshall Rathmell |

 

A recent Avantis Field Guide article focused on market dips.  It got me thinking about how these occurrences often cause us angst.  And our angst can sometimes spread to our friends, family and coworkers.  How significant are these market dips to a diversified portfolio?

People apply labels to 5% dips as “pullbacks,” 10% as “corrections,” and 20% as “bear market.” The first thing to focus on is that these percentages are arbitrary.  Furthermore, the selected names create emotional responses within us that are often detrimental to our mental and even physical health.

Here’s some actual data about dips, during the period July 1926 through the end of 2021 (about 95 years), from the Field Guide:

 

Decline of At Least (%)

 

2.5

5

10

20

Number of Declines

180

90

29

15

Median of Decline From Peak to Trough

-5%

-8.7%

-20.1%

-28.2%

Median Recovery Time in Trading Days

33

62

194

369

Average Years Between

½

1

3

6

 

By the way, the average peak to trough dip including all years is 14.3%; that’s the average dip per year; obviously the average is made up of numbers both larger and smaller.  Therefore, we all should expect dips on an annual basis.

First thing to notice is that market dips are not unusual; they occur regularly, regardless of the magnitude of the dip.  Also notice that the larger the decline the longer it has taken to recover (time to get back to the previous peak) – which shouldn’t be so surprising.

Second, although an 8.7% decline can be breathtaking, it happens on average about once every year but note that the recovery from such a dip is about one calendar quarter; that’s not too bad.  Obviously, declines of greater than 10% or even 20% are even more breathtaking, and their recovery times are even longer, but there are recoveries.  Always have been.  There is no reason recoveries won’t continue for long term investors who stay the course.

One thing this chart doesn’t show is exactly when the market started to rebound.  That’s because there’s no way to predict that.  And that’s why one should stay fully invested so the portfolio participates in the full recovery, and the next market high.

There’s no question that market dips occur, and that they occur regularly.  For long term investors they can be upsetting, but taking the long-term view, they are merely bumps in the road.