Downturns Are Painful, but They Aren't Fatal

Kids get sick. It rains on vacation. Your favorite team loses a close game. Life happens. The stock market goes down. It happens.

Stock market downturns happen often and they are painful but not fatal.

As reported by Dimensional Fund Advisors, the S&P 500 declined 12.35% from May 21 to August 24. Declines of greater than 10% are generally called “a correction.”

U.S. large cap stocks have had 28 corrections since 1926 with an average of -14.26%.

International large cap stocks have had 9 corrections since 2001 with an average of -13.33%.

International emerging markets stocks have had 15 corrections since 1999 with an average of -14.04%.

Here are the annualized compound returns for the years after the corrections:

Asset Class Next 1 Year Next 3 Years Next 5 Years
U.S. Large Cap +23.56% + 8.89% +13.33%
Intl. Large Cap +24.73% +12.69% +12.89%
Intl. Emerging Markets +42.33% +13.36% +11.20%

  History is history and averages are averages and there are no guarantees. But investing is a contrarian process and it is best to be holding and buying when everyone else is selling.

Meanwhile, income from stocks tends to grow over time. Here are the quarterly stock income increases for September 2015 vs. 2014 for some commonly held funds:

Vanguard Total Stock Market Fund Up 9.3%
Vanguard 500 Index Fund Up 8.6%
Vanguard Dividend Appreciation Fund Up 15.2%

[Tweet "Beating inflation over a long time is the most important investment benchmark."]

Low interest rates continue to pose a challenge, with the U.S. Treasury Note 10-year rate at about 2.0%. The Federal Reserve Bank is expected to raise rates in 2015.

Good news continues in a remarkably low inflation rate. While it may not seem like it, inflation was only 0.33% for the 12 months ending August 31, 2015. For the past five years it has averaged 1.80% per year, which is remarkably low compared with a 3%+ longer-term average. Beating inflation over a long time is the most important investment benchmark.

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