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We looked into the question: How often does the S&P 500 experience a 10% correction or 20% bear price move? The data below answers that question.

The takeaway is confirmation of what should be common knowledge for long-term investors, but common knowledge is often worth repeating - don't own stocks unless you understand and expect that a 10% decline from the 52-week high is likely multiple times per year, and that those declines need to be taken in stride - some other factors (e.g. fundamental, technical, macro, or investor needs specific) should come into play other than just a simple 10% price decline to exit stock positions, for those who are not traders. Stocks are highly variable in price and should not be owned without an understanding and tolerance of that fact.

It is easy to believe that you are risk tolerant in up market periods, only to discover that you are not so risk tolerant in periods of market correction. Careful consideration of stock price volatility, and construction of an appropriately risk balanced portfolio is important.

Looking at the price range by calendar quarter over 120 quarters (30 years) and determining if at any time during a quarter the price of the index was either at least 10% below the 4 quarter trailing high (a "correction" or worse), or at least 20% below the 4 quarter trailing high (a "bear market"), these data result:

  • 57% of quarters have a price at least 10% below the 4 quarter trailing high (average 2.27 times per year)
  • 18% of quarters have a price at least 20% below the 4 quarter trailing high (average 0.73 times per year)

The distribution of those events in time is shown in this bar chart.

(click to enlarge)

A more liberal look, allowing for price levels that are extremely close to negative 10% or negative 20% (essentially touching the thresholds), results in these data:

  • 63% of quarters have a price at least 10% below the 4 quarter trailing high (average 2.50 times per year)
  • 22% of quarters have a price at least 20% below the 4 quarter trailing high (average 0.87 times per year)

The distribution in time is shown in this chart.

(click to enlarge)

An obvious question is how often a 10% decline turns into something worse. Looking at the frequency of a 10% decline continuing to a 15% or greater decline, or a 20% or greater decline, these are the data from the past 30 years:

  • 10% declines proceed to 15% or greater declines 31% of the time
  • 10% declines proceed to 20% or greater declines 16% of the time

The distribution in time is shown in this chart.

(click to enlarge)

Here are the actual quarterly price charts from 1983 through 2012 that plot the 10% and 20% levels below the 4 quarter trailing highs as a dashed red line and a solid red line respectively:

(click to enlarge)(click to enlarge)(click to enlarge)

Directly Relevant ETFs: SPY, IVV

Disclosure: StopAlerts is part of QVM Group LLC. QVM has positions in SPY as of the creation date of this article (March 19, 2013). We certify that except as cited herein, this is our work product. We received no compensation or other inducement from any party to produce this article, and are not compensated by Seeking Alpha in any way relating to this article.

General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.

Source: How Often Does S&P 500 Have 10% And 20% Negative Price Moves?